Was Tesco Corrupt?

Corrupt = “guilty of dishonest practices”, “lacking in integrity”

Tesco is in a state of some chaos brought on by real market competition and has seen its business model threatened. It has always been a fighter – a company built on a culture that customers responded to well – a “pile ‘em high” culture that sought to bring low prices and wide choice.

This success was predicated by a market where the medium wealthy within society (middle class or in-work working class)– where most people existed – wanted good value and reliable products.

This outward superiority over the competition was managed through an internal capability highly based on staff knowing their job well, a high investment in systems that could gauge customers’ needs and supply them. To many suppliers it was a desperately competitive environment – with continuously lower prices and higher quality requirements.

How Corporate Culture can lead to Corruption

This culture was also, as far as can be seen, based on internal fear of failure – a numbers culture that relied on bullying to ensure that every day’s sales and profit figures were met. The Telegraph recently wrote on this subject where it said that: “Investigation into Tesco’s £250m profit shortfall unearths ‘corruption’ of culture.”

For any organisation, the culture employed for the business is critical but the headline suggests that the culture of Tesco indirectly led to corruption. This corruption came about, for instance, through accounting issues – the taking of discounts from suppliers too early (well before they could be guaranteed, apparently). The culture led somehow to the corruption – it seems that Tesco’s leadership was blind to the corruption (which, it is claimed, was only a set of accounting issues – where no-one directly benefitted).

This is the norm in some companies – especially in highly competitive markets where the differences between the competitors are hard to judge. In food retailing, the differences are price, range, full shelves, ease of use, location, quality and service. In 2014, most of the major retailers have products and services that are comparable. Tesco clearly believed that it was the best and that its strategy was right. That strategy included a culture that demanded much of its people. Overall, that is not a bad thing – until it becomes a culture that demands results no matter how achieved.

In my book “Last Line of Defense”, I described a business in a different market sector (aerospace and defense) that operated under similar cultural disciplines. It was in a business that was highly competitive and sales and bottom line results were critical. Senior management made demands on its staff. Having made those demands, senior management did not want to know how those demands were satisfied. They imposed a culture and required the response.

In the book, the CEO demanded that long-term accounting changes were made to turn losses into profits for a countermeasures system – the RWR-50:

“You have all made clear to me how the RWR-50 is going to establish Global as a world player in the defense business, at last living up to its name. Well, the first thing you have given me is a problem that must be dealt with to allow those prospects to be nourished and grow to maturity. I want your total support in my actions. Anyone that feels unable to live with this should be under no misapprehension: the only option would be to find alternative employment.”

For staff operating in such an environment, successfully meeting such demands often resulted (within aerospace and defense in the 1970’s until now) in corrupt practices. This included outright bribery of customers to buy their products. Many industries such as aerospace and defense, construction, energy have bad reputations for such methods of corruption.

In Tesco’s case, there is no suggestion that I have seen of any corruption such a bribery – at least not since the Potato bribery case of 2008 where Tesco’s potato buyer was paid millions of Tesco’s own money to swing purchases in one supplier’s direction.Indeed, The Grocer included an article only two years ago that suggested bribery and corruption remained a serious problem between supermarkets, wholesalers and suppliers.

However, just as the culture of the aerospace and defense industry directly led to corruption (with senior management often claiming denial of all knowledge of such impacts), so the culture in Tesco is highly likely to have led to accounting irregularities and the suspension of senior management. If these cases are shown to be true, then denial of knowledge is no different.

Indeed, the worst of the aerospace and defense companies, involved in long-term projects, have for many years developed ways to control accounting of such projects. Losses have been turned into profits – legally in many cases – as accounting for the future is indeterminate and unauditable. Notions of conservatism (supposedly the hallmark of good accounting) are thrown aside when senior management make different demands and shareholders need to see higher share prices and better dividends. This often led to accounting changes in that industry. It is no surprise that accounting issues are central to the likely problems at Tesco.

Governance and Culture

Of course, these accounting problems are an outcome of the culture. Bad management (misunderstanding changing market patterns and / or unable to resist them) relies more and more on a culture of threat and intimidation when things go bad or just tougher. Senior management then rely on the fact that they did not ask for accounting irregularities to be able to say that they had no knowledge – they are innocent (as innocent as Henry II was innocent of the murder of Thomas a Becket).

Some might also argue that no one directly benefitted from the corruption that is alleged to have existed at Tesco. This is also not the case. Accounting changes that improve stated profits have an impact on job security (no-one looks for “alternative employment” if they meet their targets), bonuses, share prices. Of course, unless the business then grows through increased demand, the accounting problems show up (as they have done at Tesco as the tide has gone out).

This is a serious issue for senior management. The Bribery Act of 2010 introduced tough requirements on senior management in cases of bribery. Where bribery and similar corruption is found in a company, senior management can no longer hide behind a veil of “no knowledge” of the bribery or corruption. It is now required that they are able to show that proper processes were in palace to ensure that such bribery and corruption were minimised or, better still, eradicated. Where it is clearly not the case, then senior management (Directors) can be held liable.

Good governance has now to be firmly enmeshed within a culture in a business as far as the Bribery Act is concerned. But, the absence of such good governance is shown in any company that has a culture of threat and intimidation that is likely to lead to pressure on staff to rig the statistics. In the Bribery Act, such a culture would be a sure sign of likely Director culpability. What is the difference within Tesco – if such accounting allegations are found to be the case? Although unlikely to be subject to the Bribery Act, the senior management culture at Tesco clearly led to a lack of due process that appears to be no less culpable. It is surprising that the Non-executive Directors and auditors also missed the clear links between bad culture and poor governance.

The pressure to make results no matter what resounds throughout a company. No one in the company could be immune from that pressure nor would they (at senior levels) be in any doubt of the repercussions that ensue. Accounting irregularities are an outcome of bad culture and bad governance. The Bribery Act has shown that senior management (the Board) has a direct responsibility for ensuring that culture must include good governance where bribery is a risk. There is a direct link between culture and governance and, where corruption exists, all senior management are normally culpable – processes should have been in place to minimise the risk of such “accounting irregularities”.

Bad culture leads to bad governance and potentially to corruption – the links are known and understood.

If the allegations are proven, then Tesco was corrupt. Probably not alone.

Go to:

Was Tesco Corrupt? – II

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Cutting through the Fog – Corporate Secrets and Beneficial Ownership

David Cameron promised last week at the Open Government Partnership Summit that companies registered in the UK would be obliged to reveal their ultimate ownership and that the public would have access to those records.

This was a major statement of intent: evidence that the UK was not going to condone the opacity of companies or owners that could possibly be engaged in criminal dealings or those who are perfectly innocent but choose to inhabit the same smog-bound territory of corporate secrecy.

Why the secrets?

More accountability is a hard-won struggle in an era where our secrets are open to secret services like the NSA and where government secrecy is hard to lessen, Through all this opening up, companies (and Trusts) operating on an international level have reatained an unwelcome ability to shield themselves from public view. At a time of real debate about privacy (Snowden, The Guardian, the NSA, Angela Merkel’s mobile), companies that seek privacy have remained relatively immune.

Companies are treated as individuals under the laws of most countries yet have the ability to hide their ownership and deal with their taxation (if operating multi-nationally) wherever they choose. This means, of course, that they usually choose what is right for them not for the wider society in which they operate. That is their remit. The recent shake-down of Starbucks, Google and others over taxation – which, to date, has yielded not much more than the voluntary promise of payment of a few tens of millions by Starbucks – was a tip of the iceberg moment. With corporate taxation in the UK heading downwards, the current government coalition seems determined to accept the Institute of Directors’ call for companies not to be taxed on their profits at all!

However, one thing about tax is that we can all see how much a large corporate pays in the UK (about a year after the event when it publishes its accounts). What we don’t see easily is where a company has overseas affiliates with which it “trades” – such as paying royalties for the use of its name – in secret jurisdictions where tax is often negligible.

This nonsense of transfer payments and royalties (which HMRC showed last week to the Public Account Committee it has no real understanding over) shifts massive amount offshore and out of the country where real business was done to tax havens.

The fear often cited that proper taxation would force companies out of the UK is nonsense. They do real and profitable business here – the UK is the world’s seventh biggest economy (or thereabouts). Why on earth does anyone believe that they would move away from doing business here? Can anyone imagine that Apple would close its Covent Garden store if they had to pay real tax in the UK rather than shift profits to where the name “Apple” is deemed by a tax expert to reside? Being afforded the space to sell its (excellent) products in the UK, to use our roads, lights, take on people educated here and all the other benefits of selling in the UK (which includes the iconic area of Covent Garden in London) are well worth the entrance fee of corporate taxation.

Offshoring the owners

However, David Cameron’s speech was not specifically about offshoring taxation – it concerned beneficial ownership issues and these are, of course, linked to taxation in a major way but it is much more than that.

The fog of hidden beneficial ownership means that companies are set up which can channel profits or simply flows of revenue to places where tax does not apply and where no-one knows the beneficiary. This is a typical and easy-to-organise ruse of the criminal world. For many years, criminal networks have laundered their revenues offshore – it used to be through the transportation of suitcases full of notes; these days, it is a little easier. This not just saves tax – it transforms illegal earnings into clean money that can then be brought back again into the real economies via the normal banking system.

With the improved ease of transmission of money across the world, it just takes complicit banks to enable the movement (along with some accountants and lawyers to get things under way) and, hey presto, money surfaces wherever it is wanted without anyone knowing.

Just watch the antics of Breaking Bad attorney Saul Goodman – now getting his own series. The essence of monetary manipulation is built around secrecy and contacts. Governments cannot easily stop the development of the latter, but they can do much to stop the former – making beneficial ownership transparent.

Lining Up for Secrecy – the Fog of War

To the vast majority of us, this is obvious, but to many it is a declaration of war. Many secrecy-led jurisdictions are concerned about their future. It is not just Cyprus where the dominance of “financial services” is far too big for the country – Cyprus became completely over-dependent on banking, Russia and lack of due diligence. According to the Tax Justice Network there are 73 secrecy jurisdictions around the world that they analyse.

Of these, a staggering 35 have some substantive connection with the UK. One of those is Jersey and Jersey Finance’s CEO, Geoff Cook, voiced his concern on Friday when he heard David Cameron’s pitch. In his blog he refers to the public register:

It is not yet clear what will be on such a register but unless this is adopted by the G20, I would confidently predict that  Mr Cameron is likely to have lots of friends in the AID world and insufficient food on the table at home.
Protecting business interests, trade secrets, safeguarding personnel from fringe, sometimes violent campaigning groups, from corrupt political elites and from criminals are all real and weighty concerns.  It is telling that the NGO community are happy to  subject those who have worked hard and done the right thing to a much greater degree of scrutiny than almost any other constituency in society.
There is little difference from opening up the private company arrangements of business owners to the public glare of NGOs, journalists, cyber criminals and the assorted flotsam and jetsam of the worldwide web, than for ordinary bank accounts. If the logic holds good do we not need to know the balance publicly of all personal bank accounts so that all can be sure we came by our cash by legitimate means?
We have nothing to hide in Jersey and we have been active supporters of government to government information exchange. However, the voyeuristic tendencies of politically correct elites should not be indulged and indeed will not be by the vast majority of countries, leaving the UK out on an uncompetitive, uncomfortable and potentially impoverished limb.

It is extraordinary that arguments for secrecy over beneficial ownership are now wrapped up in screams about safety from “violent” campaigning groups and cyber criminals. These are the words of fear – fear for a future that may have been predicated on the Cyprus model and lack of such due diligence.

Secrecy over beneficial ownership allows vast amounts of money to be electronically channeled out of not just the UK developing nations. That cannot afford the losses. Huge amounts of wealth properly owned by citizens of countries such as Guinea, DRC, Angola and others are secretly moved and laundered – often with the help of banks (who are now in the firing line of authorities especially in the USA). As TJN itself states:

Secrecy jurisdictions facilitate illicit financial flows.

Illicit financial flows stem from three major sources: bribery (corruption in its narrow sense), criminal activity and cross-border tax evasion. In doing so, secrecy jurisdictions and the secrecy providers operating through them play not only a major role in preventing the poorest countries from developing out of a state of dependency and poverty, but they help creating a criminogenic environment in which all sorts of crimes can thrive and feast on the fruits of breaking the law.

The crimes that are facilitated and whose financial reward is secured by financial opacity and the resulting secrecy comprise, but are not limited to: tax evasion, aggressive tax avoidance, money laundering, terrorist financing, drug trafficking, human trafficking, illegal arms trading, non-payment of alimonies, counterfeiting, insider dealing, embezzlement, fleeing of bankruptcy orders, illicit intelligence operations, insider dealing, all sorts of fraud, and many more.

Clearing the Fog

David Cameron has made a real commitment but there are real obstacles to further progress.

The first is implementation.

Those involved in celebrating the introduction of the Bribery Act in 2011 are rightly concerned that its implementation is suspect. As Jack Straw, then Minister of Justice, said in the original White Paper, there was unlikely to be many cases brought before judges as a result of the Act. This has been borne out in practice along with insufficient funding of investigations, low numbers of court actions and Bribery Act guidance that was aimed at stifling the Act’s powers. Proper and funded implementation of real transparency and public availability of that information is now key to ending secret beneficial ownership for UK-registered companies.

The second issue is around Trusts. These are not covered by the PM’s statement or commitment yet Trusts are a key secrecy weapon for criminal activity across the globe.

The third issue is that the commitment only applies to the UK. This will serve some purpose in helping to clear money laundering from this country but the UK should now use its leadership wherever it has influence. This is direct in the 35 secrecy jurisdictions mentioned above but also in other forums where the UK has any influence – such as the G20, EU, FATF (Financial Action Task Force).

The fog remains but the UK is beginning to spy a way through – taking a lead on an issue on which millions of lives depend outside the UK. It is not the problems of those in Jersey’s Finance Ministry we should most be concerned with but the problems of those in countries where massive corruption by those in power is facilitated by banks and secrecy jurisdictions – resulting in billions leaving the countries (far higher than Aid going in) and that means millions having to survive on a $ a day with no medical facilities let alone schools or economic opportunities.

Time to see above the fog.

Going Soft on Power

We are all looking back on 2012 as the year when the UK has been said to lead the way in a number of areas – the Olympics, Sir Bradley Wiggins and the Tour de France, Murray and the US Open, James Bond and the Queen, with Danny Boyle wrapping it all up to show the UK on the side of good.

But, like every nation, we are not just the nice guys. The UK has also become better known internationally for bribery and bank irregularities (LIBOR fixing, money laundering for terrorists), the Leveson inquiry into the press and phone hacking, the indictment of our police over Hillsborough, alleged police wrongdoing that led to a cabinet minister resigning (Andrew Mitchell) and Jimmy Savile reminding us all of what this country was like just recently.

So, 2012 has been a very strange year for the UK – a “curate’s egg” of a year. Monocle Magazine (itself named after an eyepiece that was popular in the 19th Century) rated the UK the world’s top “Soft Power” in 2012 as a result of the Olympics, Murray’s tennis feats and James Bond (among other things). Yet, at the same time, our banks are being shown up for massive failures on LIBOR, HSBC’s lack of control and willingness to allow money laundering on an exceptional scale and the recent Rolls Royce bribery allegations.

The UK is home to amazing ideals and potential: from sports stars and a tremendous passion for sport, home of democratic freedoms, a country based on welcoming the world to its shores and an internationalism based on a long-lost Empire and a need to be important but be seen to be doing the right thing; an independent spirit that makes us not want to be subsumed in Europe or the USA but to straddle the middle and be all things to all.

The UK is also home to the World Wildlife Fund and to a host of NGO’s and charities that see the UK as the centre of the struggle for the world to be a better place. Our aid programme (directed by DfID) is well-meaning even if sometimes misguided (recent nonsense in Rwanda being a good example).

Yet, business and financial irregularity brings our self-righteousness back to earth with a bump.  While we may be able to export a high degree of soft power through our great sporting and artistic talents, a nation like the UK has to be wary that its reputation is not completely destroyed by letting our ancient mercantile and trading instincts come first. Sometimes we don’t know if we are on the side of James Bond or SMERSH.

Britain’s “export” trade

The UK was a mercantile nation well before becoming the first into the Industrial Age and its Empire was established on the back of pioneering instincts and a trading mentality – heavily mixed with politics and ownership. Our wealth was built on the back of exploration and an eye for what sold well – whether it was gold or slaves.

Whereas the Chinese and its tributary system did not seek to rule the countries with which it traded, the UK sought vertical integration through Empire. It exported its laws, its systems, its language and its instincts throughout the world – the good and the bad. Writers like Niall Ferguson have debated whether, on balance, the British Empire has done good or bad overall, but, like the apology being demanded currently for Turing, this is history. As AN Wilson so majestically says in “The Elizabethans”, it is hard for us to look back on that age with the eyes and experience of the 21st Century.

What matters today are the after-effects of the actions taken and also in the actions being taken today along with the belief systems that are current. While Monocle may be right that we export some good and reap some soft power, the UK also exports some bad that may well negate the soft power that we so want to aspire to at a time when the West’s economic power is diminishing fast. Joseph Nye calls the mix of soft and hard powers,  our overall “smart power” and we are in danger of losing the “smarts”

When Transparency International – UK was setting up its “Defence against Corruption” project and I was an adviser to them, a great deal of discussion took place about how corruption has three legs  –  the corrupted (the government and individuals who were bribed), the corruptor (usually a company that did the corrupting) and the nation where the corruptor was based.

Much of the discussion around TI’s Corruption Perception Index is about the first, but the latter two are as much party to the corruption as the corrupted.

When Jack Straw originally produced his white paper which ended with the introduction of the Bribery Act (a very late addition to the codifying of our laws and the subject of many years fighting between NGO’s and companies as well as between the UK government and OECD – where we had signed up to the OECD Anti-Bribery Convention many years before), he pointed out that the UK was a relatively bribery-free nation.

It is true that since the times of Samuel Pepys (when anything could be bought through bribery) the UK has cleaned up its act at home. As we became wealthier, we became less corrupt (although there remain many instances of bribery and corruption still).

However, in some ways we became more Confucian – we were most obsessed with doing right at home and exported our worst sins overseas. Companies from the UK in many industries such as energy, construction and aerospace and defence bribed for business. As the recent ITV programme “Exposure” aired on 10th October, 2012 showed, bribery by British firms overseas remains too common despite the Bribery Act. Rolls Royce is accused of two major acts of corruption in Indonesia and China dating back several years. It will have to show that its systems and policies are now consistent with the Bribery Act requirements or staff could be held culpable.

National reputation – national character

In the defence industry, the cry was always “If we don’t bribe, the French will”. The Chinese and Russians may be the chief bribing competitors these days but we have now enacted the Bribery Act – so, by law the exporting of bribery by companies from the UK should be at an end – including any company that does any business in the UK.

Maybe the issues that have been uncovered at Rolls Royce are old news but many concerns persist and suggest that the short-term gain mentality remains. In a posting from October I reported on a Financial Times article (from a survey by FTI Consulting) that showed a third of board members in the UK would bribe if they felt it was needed to win business. This worrying statistic shows clearly that the UK’s soft power base is in danger.

Our 2012 national reputation was portrayed in Danny Boyle’s Olympics opening ceremony as quirky but unselfconscious; a nation of tremendous artistic, scientific, engineering and business success, caring and cultured. Ai Weiwei summed it up well in an article in the Guardian (it is well worth reading the whole article:

“Brilliant. It was very, very well done. This was about Great Britain; it didn’t pretend it was trying to have global appeal. Because Great Britain has self-confidence, it doesn’t need a monumental Olympics.”

This was a characteristic portrayed throughout 2012 – a year when our sporting achievements have been at their highest in athletics, in golf (along with the rest of Europe), in tennis, in cycling and in cricket (we even beat New Zealand at rugby). Only in football (our national sport) has a less than successful and a less than wholesome image been portrayed.

But, maybe this is where the link may be. Football has become a huge business and business has no ethics of its own – we are continuously told that companies have no souls (as tax avoiders such as Google, Starbucks, Amazon and the rest show clearly). Football was a working class sport but is now a multi-billion pound successful business. Its sporting soul has disappeared as our exports grow – its “self-confidence” becoming mere hubris.

Soft power and hard exports

It could be said that football has not suffered yet along with its financial success (it still has its fan base). It took someone like Lord Coe to defeat the doomsayers that forecast the Olympics in London, with its huge corporate branding, would go the same way but it was a success with real people. Football remains hugely popular but the corruption in FIFA allied to racism at football grounds in Eastern Europe and the huge pay gap between the performers (being paid £20,000 and upward per week) and the fans means that its brand is continuously being corrupted.

If, in the age of smart power, if it is to be a continuing success, brand UK has to be clear and focused, not tainted by bad business ethics. It means not just abiding by the rules of international business but setting the standards – to take advantage of the good will that has been gained in 2012.

This means swapping the short-term (unreal) benefits of poor, 19th trading standards (where bribery and corruption was rife) to set real standards that are enshrined in the 2011 Bribery Act but where the UK has not put in the resources to implement the Act, where the US has shown a willingness to prosecute its own malfeasants in a way that shames successive UK governments.

Soft Power has to become (to use Nye’s term) smart power. Smart power is the ability to take advantage of the benefits that come from our leadership in key areas and to trade on them. Danny Boyle (through the Olympics opening ceremony and his refusal of a knighthood) shows the way away from the 19th Century mercantilistic British norms to a UK that has the ability to lead the world with its soft power allied to economic and political capabilities. This means waking up to what the 21st Century could mean – a global economy where improved communications can kill a business in progressively much shorter times as well as upsetting the benefits that the likes of Tolkein (The Hobbit is a classic British tale) and Fleming and the rest have provided to the country as a whole.

It means being self-confident enough to be seen to espouse good business not business at any price or any cost. There was no government reaction to the FT report cited above. There should have been. Doing good business is becoming the next stage of capitalism – we should be at its forefront as the challenge of the Chinese and others (who aspire less to this cause than the vocalized western consensus since WWII) grow: good business rather than bad business.

This is a hard ask in the depths of recession – but, if the UK is to capitalize on its soft power base, then a UK for the 21st Century has to be built on a smart power base – rather than simply going soft.

Where the Wild things are – bribery at the edge of business

The Financial Times (http://www.ft.com/cms/s/0/e12e0efc-0d71-11e2-bfcb-00144feabdc0.html#axzz28VeYteen) reports that one third of Board members would happily bribe to win business despite the introduction and publicity over the Bribery Act that was enacted in 2010 and brought into law last year. FTI Consulting, which did the survey, believes that the Serious Fraud Office is showing no desire to investigate and prosecute low level crime and is only after the big boys (www.fticonsulting.com/…/the-realities-of-the-uk-bribery-act.pdf).

 

This is no surprise to those of us involved in agitating to bring the Act into being – 34 years after the FCPA in the US and years after we signed up to the OECD convention. Jack Straw advised that around 1.1 extra prosecutions a year would ensue from the Act – so, no real surprise.

 

The Grown-ups get it

 

The report from FTI shows that businesses are being divided into those (usually large and quoted) that comply and other who are becoming the “risk takers” – willing to go for business in whatever way and hope they don’t get caught.

 

Like tax evasion and using deep and difficult schemes to evade tax, these organizations are willing to act outside the law and depend on the SFO’s inability to implement the law.

 

The grown-ups get it, the kids don’t – but, we have insufficient numbers of grown-ups in the SFO (many of whom left to go to private industry when the Bribery Act came into effect).

 

Just like Maurice Sendak’s children’s book, our small and medium companies wander into places and get transfixed by the wilder side of business. It wasn’t that long ago that the costs of bribery overseas were tax deductible in the UK and big companies (especially in defence and aerospace, construction and energy routinely bribed to get business and keep business.

 

Now, most large UK-based businesses act like their American and European cousins and have mainly (not completely) forsaken large-scale bribery. The SFO has said it will prosecute those who threaten the stability and reputation of the UK.

 

ITV’s Exposure on Wednesday, 10th March at 10.35 (UK) – “No Bribes Please, We’re British” – takes a look at the UK one year on. I spent some time helping with this documentary made by Ed Harriman and was interviewed for it – http://www.radiotimes.com/episode/sgzfv/exposure–no-bribes-please-were-british and it looks back at how we did business before the Act – and how many still do such business now.

 

 

This leaves the kids – SME’s / SMB’s.

 

Should we worry about the children?

 

Winning business overseas (especially in the BRICs – where methods of business may be different) in any recession is tough. Competition from those who don’t worry about giving bribes (and that is much more of a norm in the rapidly growing nations of Asia, Russia and South America) is enormous and business leaders want a level playing field.

 

The OECD Anti-Bribery Convention was signed by 39 nations – all the OECD countries plus Argentina, Brazil, Bulgaria, South Africa and Russia (China has not signed) and aims to tackle the “supply-side” of bribery. This is where the money comes from – the wealthy nations that enable bribes to take place. It was on this basis that the UK eventually enacted the Bribery Act.

 

The question asked is now that the Act is in force and most very large businesses comply, does it matter that the smaller ones don’t? Shouldn’t we only concern ourselves with large-scale bribery and corruption?

 

While we don’t want to go back to the 18th Century when you could get sent to Australia for stealing a loaf of bread, the impact of bribery is substantial. From small-scale “facilitation payments” upwards, bribery impoverishes and kills. This sounds overly fraught maybe – but, funds diverted to projects that a country does not need means less is spent where it does – on doctors, hospitals, safety measures and the like. As bad, poor construction of buildings and bridges in China (as an example) causes death each year – the contractors are normally found to have won the work through bribery.

 

In the 21st Century and in our global economy where we are all much closer to each other economically (as customers and suppliers), we need to ratchet up the standards not diminish them. The UK is a wealthy nation that can do without involvement in helping to destroy developing nations. Bribery is a constant threat at any level as Transparency International constantly shows in their annual Corruption Perception Index. Even in industries like Defence which have been subject to anti-bribery investigations for many years, the picture is unclear as TI have recently shown: http://www.transparency.org.uk/news-room/press-releases/13-press-release/375-defence-companies-fail-anti-corruption-test

 

Now countries like Greece, whose economy has been based on corruption, are paying the price. Countries like Mexico are likewise – http://www.nytimes.com/2012/04/24/world/americas/bribery-tolerated-even-as-it-hurts-mexican-economy.html?_r=0

 

Bribery hurts those countries receiving the bribes. If we let our kids (the SME’s) run amok, then the hurt just grows. We have to keep our neighbours safe.

 

Getting an ASBO

 

In the UK, Anti-social Behaviour Orders (ASBO’s) are now routinely given out by police to kids who run riot in the streets and disturb neighbours. The UK was close to receiving the equivalent from the OECD before the Bribery Act was enacted. The UK had to be pushed to enact it – although all party support was eventually forthcoming.

 

Now, a year on, we see that lack of implementation (always feared by those most supportive of the Act) looks like it is providing those with more risk attuned attitudes to buck the system here and enter into the system overseas. Our neighbours (our trading partners) often don’t help – bribery takes a long time to eradicate and often governments are implicit in it. But, countries like the UK managed to stop slavery, made drug running illegal (although after we grew rich on both) and campaign to stop child-labour improve safety standards worldwide. Bribery seems a softer crime to many yet studies have continuously shown that the impact can be as horrific.

 

The UK is in recession but a get-rich-quick attitude that admires tax evasion (and tax havens) and tolerates bribery is not a modern society – it is a throwback to the 19th Century. We deserve credit for enacting Bribery legislation and we deserve an ASBO for tolerating bribery and for tolerating the use by foreign businesses especially in the energy sector that use London to raise capital on the stock exchange – and who are notorious for their poor business practices in poor health and safety and corruption.

 

The current UK Government has been mute in its delivery on anti-bribery provisions and the FTI survey – which should be a wake-up call – has received scant reaction. Watch Exposure on Wednesday, 10th October at 10.35 (UK) – No Bribery Please, We’re British. One year on from the Bribery Act, we should not be rolling back the legislation by lack of implementation.

 

 

Left-right, left-right: Parties and cliff edges

In the UK, Members of Parliament go back to work after the summer recess. All the talk is about Cameron’s reshuffle and leadership issues: Cameron is accused of acting like a “mouse”; Clegg’s leadership is under threat from his own party; the two Ed’s of Labour (Miliband and Balls) are said to be continuously arguing and that the phrase “two Eds are better than one” may not be true in this case.

More seriously, as the post-summer issues are traditionally short-term nonsense, last week’s Prospect Magazine has Peter Kellner (President of the pollsters, youGuv) writing an intriguing article on how the Liberal Democrats’ support has collapsed since the last General Election  http://www.prospectmagazine.co.uk/magazine/death-by-coalition/. As a result of entering into coalition with the Conservatives, their support has gone from 24% to 10% – which would result in a fall from 57 to around 10-12 seats if an election were to be held today.

While much of Kellner’s response to the polling made good sense, one aspect of the questions his pollsters asked concerns me greatly. This aspect focuses on how much to the left or right the party is.

The concern is this: surely, this form of questioning is out of date in the realpolitik of 21st Century thinking and 21st Century politics. Surely, in an age of individualism and the lobbying by NGO’s and many one-issue organisations of one issue arguments, the left / right analogy is no longer relevant?

Is politics really about left vs right anymore?

The left and right of politics were named after where the French parties sat in the National Assembly in 1789 at the time of the revolution. In 1791, the Legislative Assembly had the “innovators” on the left, moderates in the middle and the defenders of the Constitution on the right. This became the dominant march of politics in the 20th Century. Different and violently opposed political doctrines literally fought it out on the battlefield throughout the 20th Century. Fascism and Nazi-ism on the right, Communism on the left were the extremes in the battlefields of China, Spain, Cambodia, Europe (in WWII) or wherever the post-feudal wars (those that we fought up to the end of the first world war) were fought. Innovation became muddled with socialism and communism; defenders of the constitution became muddled with economic rigour and libertarianism capitalism (never the manner of the “ancient regime”).

Right and left became doctrinal and, with the fight for the rights of labour against the owner class, the 20th Century adopted the political norm.

Is economics an argument of right and left?

Now that the 21st Century is into its twelfth year, the left / right argument appears completely out of date. Sure, there are arguments about economics that will be with us forever: from libertarian, tea party protagonists all the way to Keynesian interventionists. But, because capitalism is now the standard economic and accepted model, the battle is not right vs left in economics but which form of economic model around the capitalist norm. Arguments are much less severe in developed nations and turn on moderate changes in taxation.

Much bigger issues, such as ending tax havens, transfer pricing, corporate power, corporate governance, the role of banks, corruption and many other crucial issues are stymied as politicians argue over the short-term vote catching issues – 1p or 1c on income tax, for instance.

Is the way we are governed right vs left?

Communism or socialism now only survives on the periphery. China is not a communist state – its economics are capitalist within a statist structure and the party ensures a legalist control (it is above the law). This is not communism. Russia is now a centrally controlled capitalist enterprise (run as a large corporate machine). The rest of the world operates in a democratic to quasi-democratic state. Hereditary monarchy is now mainly for the tourists and the press (celebrities within a celebrity culture).

There is little traditional right vs left in government.

Is the environment a subject for right vs left?

Here, confusion reigns. Traditional right-wingers in the UK (from a Tory mould) can be classed as conservative when it comes to the environment. They often oppose untrammelled modernity and defend the right to conserve (as “Conservatives”). Yet, they oppose green movements because they associate them with restrictions on economic growth. Roger Scruton in “how to Think Seriously About the Planet – the case for an environmental conservativism” http://www.amazon.co.uk/Think-Seriously-About-Planet-ebook/dp/B00829L62C/ref=sr_1_1?ie=UTF8&qid=1346585639&sr=8-1 puts the case for the right to take back control of the agenda.

The affects of CO2 are now disputed only at the periphery but the case for changing our ways is not agreed. This is now much more about individual nations wanting their own freedom and more about the problem of worldwide agreements – not a right vs left issue at all.

Does politics need right vs left?

Less and less people vote in general elections. Maybe the reason is that the left vs right arguments that drew people’s interest and motivation are no longer prevalent. The motivation to vote for broad platforms which mainly focus on short-term issues designed to entrap voters based on their short-term economic concerns is weak. Tradition still subjects most voters to choose their party and most political parties focus on swing votes – the 2% that Romney and Obama will work to win over in the USA, for example. The 2% that means that 98% are virtually disenfranchised!

The traditional view of politics is one where political parties are formed to organize themselves so that they can attract votes from the individuals who are not organized. This is changing.

Individuals have always formed into non-political party groupings – from trades unions to employer associations, from charities to NGO’s. Many of these groups are single-issue campaigning groups or lobbyists that work hard to influence political opinion and political parties directly and via the media. These range from economic groups to environmental, from governance to charitable, health to education – the spectrum is vast.

This third sector (usually a reference to charities, but comprising all citizen action groups, from sports clubs onwards) is not primarily left of right, but single focus – taking up an issue or cause around some issues. Their influence on government is substantial. Most Government Bills are developed as a result of significant lobbying from single-issue groups. For example, the Bribery Act came into being as a direct result of such lobbying and formal meetings between Government and a diverse range of lobby groups from CBI to NGO’s.

This means that the ancient Greek form of democracy – where every individual is supposed to have an equal say in Government – which was never the norm in most democracies as political parties formed – is now fractured into more layers. Government now relies on the lobbyists and reacts more to them than the community or study groups assembled from the general populace prior to elections.

This means that the left and right of politics (already under strain anyway) are meaningless. Single-issue groups lobby on single issues and political parties, no longer fighting on the issues of left vs right, sway as they are buffeted by those who are able to articulate the issues and now the means to communicate effectively. This means that the individual voter is now even more disenfranchised as it is only a small fraction of the population that is engaged in this process – and that, even at elections, the driving force behind vote-catching is bound to short-term or lobby focused.

A new politics?

In an era of globalization and instant communications, individual nations are less able to maintain an individualist position. Nevertheless, as the Olympics and Paralympics have shown in the UK, national pride remains important and is a reason why the Eurozone crisis will endure much longer than hoped.

However, within this national pride, it is likely to be an era when individualism is also crucial. The mass movements of left vs right are no longer relevant and single issues are much stronger in motivating and exciting.

If there is any truth in this then it is interesting to note the preamble to the Liberal Democrats Federal Constitution:

“The Liberal Democrats exist to build and safeguard a fair, free and open society, in which we seek to balance the fundamental values of liberty, equality and community, and in which no-one shall be enslaved by poverty, ignorance or conformity. We champion the freedom, dignity and well-being of individuals, we acknowledge and respect their right to freedom of conscience and their right to develop their talents to the full. We aim to disperse power, to foster diversity and to nurture creativity. We believe that the role of the state is to enable all citizens to attain these ideals, to contribute fully to their communities and to take part in the decisions which affect their lives.”

In the nonsense over cabinet reshuffles and personalities, it is probably the case that very few even know where to look for the above statement http://www.libdems.org.uk/who_we_are.aspx  – (which is found on the Liberal Democrat website after its coalition agreement – which is all short-term).

Yet, it could be the clarion call for our age – a liberal theme that is far more “of our age” than the 20th Century arguments of right or left.

If right vs left is truly out of date, then open society, balancing liberty, equality and community, individualism cherished, developing talents, creativity and the rest within a coherent community is a proper and enticing call that should be further developed. Apart from a better focus on the environment (our natural capital) which demands more from us, the preamble is not right or left – it is also not middle ground but moves the argument away from traditional left vs right.

Citizens of the 21st Century world maybe deserve something more from our governing elites that have not moved from their 19th Century models.  How we balance our competing single issues and how citizens get to have their say in the crucial issues that determine how we spend our lives is what 21st Century politics should be about. Maybe parties like the Liberal Democrats should think of the themes that will dominate thinking in the 21st Century. Maybe that is a way to get some common ground with citizens – the voters.

The Financialist-Political Complex

The Military-Industrial Complex is now old news

 

Investment banks ran amok and created financial disaster; Governments bought up the debt and have created sovereign debt bubbles and a crisis in the Eurozone; banks are now found to be rigging LIBOR and potentially costing savers and borrowers billions of dollars; banks are accused of rigging software that would have told regulators they were channeling drug money and terrorist finances through the banking system; small fines are levied which provides a huge rate of return on those “misdemeanors”.

So it goes on and on from when “the tide went out” in 2007 and we have forgotten the ever-depressing news from just a few years ago. Back in 2009, Lloyds TSB (now 43% owned by the British Government) was fined $350m for similar offences to those HSBC are alleged to have committed.

The US Department of Justice alleged that dating back to 1995, Lloyds falsified wire transfers involving countries or individuals on the US sanctions list.

In effect, the bank removed customer information so that transfers would pass undetected through sanction-focused filters at US banks, violating US federal law aimed at starving terrorists of money in certain countries.

Manhattan District Attorney Robert Morgenthau said: “The Iranian banks have money on deposit in London with Lloyds. They were having Lloyds send the money to the US and beyond and stripping the identification.”

In a statement, Lloyds TSB noted that it set aside £180m last year pending the settlement, and said that it “does not anticipate any further enforcement actions.”

Now, HSBC have made a similar settlement and the regulators are lauded for their achievements three years after the almost-forgotten Lloyds TSB case.

Nepotism

Government, politics and financiers have run nations together for hundreds of years. It is unlikely to change anywhere or anytime soon. What properly functioning societies should be able to do is to work to prevent the worst wrongs being committed. We clearly have not managed that in the last five years and our counter-balancing systems are not in place.

Especially in the USA and UK (but the same is true elsewhere as well) Governments and politicians in most major parties have contrived to provide the finance industry with freedom and have reduced the risk of failure to almost zero. This is now a tired story, repeated many times. Yet, five years on from the initial discovery of sub-prime devastation in the USA, has anything changed? Do we even recognize the real problems?

The nepotism within the family of government and finance persists and becomes more insidious. Banks and the finance industry are by far the most favoured by politicians. Bankers and financiers understand what drives the business of politics as well as what drives the engine of business on which they depend. A core problem is the very understandable reluctance of politicians (and in most cases their lack of understanding) to do anything. Democracies have lost the grip over a key element of our societies – and there is little being done to remedy that problem.

The reasons are simple: one the one hand, banking provides the lubrication for economic growth and, during good times, huge tax revenues ; on the other, political parties are funded by those who have made and still make their money in banking and finance. This is especially true in the USA and UK – which are heavily tilted economically towards the finance industry, but it is also true in the EZ land wherever banking exists (internationally, nationally or regionally, politicians are usually in hock to the finance industry). The interlocking of politics and banking is extraordinarily tight – it has been for a long time. We should not be surprised that very little is being done now to change this. Governments bailed out the banks by taking on their debts and continue to supply massive liquidity to the banking system. The combination of economic growth, tax receipts and party donations is too big for them to ignore.

Post-2007

We say the word changed post 9/11, but what changed post-2007, after the banks were shown to have failed our economies. Sure, many people now vilify the banking community as they do wartime con men or spivs. We feel that the banks and the bankers (especially those in investment banking) have taken us all for a ride. This was a ride they could not lose. They made huge money for themselves as individuals on the upside and lost nothing on the downside. True, a few like Fred Goodwin and recently Bob Diamond have lost their jobs – but, they remain seriously wealthy, having never actually paid for mistakes in the way an entrepreneur would have. They haven’t lost their homes whereas many others have. The risk: reward ratio was and remains massively in favour of bankers and the banks. Nothing has changed.

Banks that are too big to fail are still in place and the Vickers Review in the UK envisages nothing more than Chinese walls between the casino elements and the more traditional forms. Chinese Walls in banks (!) – the same banks that have engaged in LIBOR fixing, in sub-prime marketing, in money laundering. The same banks that are deemed to have dubious ethics and poor control systems, where compliance officers resign because of the lousy job they do and are given as good a job elsewhere in the business (just like arms manufacturers did for their staff caught bribing in the 1980’s).

Banks have now taken on the mantle of the defense companies that were ridiculed in the 1970’s and later for corruption on a world-wide scale (and where corruption continues in many, but differing areas). From the introduction of the Foreign Corrupt Practices Act – FCPA – in 1977 in the USA (which is now under sustained attack in the USA by Chambers of Commerce), it took over 30 years for the UK to pass the Bribery Act and it will take many more years to ensure proper implementation. It is a relentless task to keep corruption under control – society has, though, a way of dealing with it, an understanding of it and a willingness to keep at it.

The Military-Industrial complex remains in place but it is no longer the ogre it once was (in the West anyway – even if the corruption engaged in by China, Russia and other newer entrants is destabilizing that market and affecting the resolve). Now, a bigger threat is the Financialist-Political complex (see Forbes July 2012 – Beware the Financial-Political Complex ) that has forever been in place and is now assuredly seen as a major threat. The only benefit of the financial disasters of 2007 is that the Financialist-Political Complex is no longer under cover – it is now there for all to see just as the Military-Industrial Complex was “uncovered” by Eisenhower in the 1950’s. The big question for the rest of society is what to do about it.

Tom Armistead (http://seekingalpha.com/) described Financialism recently:

Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.  Financial instruments…are in their original form firmly linked to economic reality.  However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.
I would add that Financialism should also include the undue influence that banking and finance have on politics, politicians and governments.

An FCPA for the FPC  (Financialist-Political Complex)

The inherent corruption of the investment banking industry, its progressive drive towards Financialism and its close relationship with Government means that it will take enormous sense of purpose and quite some time to make a change.

What the world needs is an FCPA not just for Financialism but for the Financialist-Political Complex – the FPC – where the world of banking and crazed financial instruments has bank-rolled governments and carries governments and politicians by its supposed economic force.

An FCPA for the FPC would mean that we first have to recognize the problem. It is not just a problem of the banking industry but a recognition that financialism and government are too intertwined and need to be separated – especially in the USA and UK, but, because the world is a global market, world-wide in a way that the OECD convention bribery made the FCPA a world-wide requirement.

  • We need to ensure that tax havens (the spiritual and economic home of financialists) are deprived of their tax haven status.
  • We need to ensure that taxes are paid where profits are made and that the virtual reality world of financialism is not allowed to exploit loopholes in tax regimes.
  • We need to ensure that political parties are not beholden on financialism so that funding for political parties is through contributions limited in size to, say, £10,000 or $15,000 or €11,500 or similar per person or company or association or union.
  • We need to ensure that that the financial instruments of the financialist industry are separated from the rest of the banking industry – not just by Chinese walls but by legal separation into separate entities.
  • We need to ensure that compliance regulation is strong in all countries allowed to carry out international banking and that compliance officers and managers are independently regulated and independent from those who sell financialist products. FATF needs to be given real powers but the OECD and other multi-national organisations should seek to ensure that banking and politics are kept apart and that influences are controlled. This will not inhibit growth – the disasters of the last 5 years have shown the impact of poor banking – its cost is in trillions of dollars.
  • We need to ensure that risk:reward ratios are proper and commensurate with those faced by entrepreneurs – who risk their homes and all their wealth. Managers should not see upward only rewards at the expense of shareholders and society.

The FCPA that led to the OECD anti-bribery convention and later to the Bribery Act in the UK was a forerunner that helped to shape the course  that the western world took in terms of governance and anti-bribery. Its impact, itself, is in danger of being blown off course by the economic problems caused by the financial collapse of 2007 as much as by the new players of China, India, Russia and Brazil. Nevertheless, it shaped a cultural direction that has endured and has done much to re-shape the military-industrial complex.

The financialist-political complex is where the military-industrial complex was before 1977. It needs a massive change in our culture and an understanding that it is not just focused on the banks but also the governments and politicians that depend on them so much that need changing.

Let me finish with another quote from Tom Armistead:

Banks need to be returned to their primary purpose, which is to serve the real economy, as financial intermediaries between those who work, save and invest, and those who need funds to create new means of production, or to buy a home, or a car. 

To go slightly further:

Banks and the whole finance industry need to to be separated from their nepotistic relationship with Governments and politicians so that their interdependence is no longer the massive risk that forces all of us to pay for it. We need an FCPA for the FPC – the financialist-political complex.

Should Everything have a Price?

Michael Sandel in his recent book “What Money Can’t Buy: The Moral Limits of Markets” writes excellently on how the market economy has turned into the “market society”. This view echoes Galbraith and “The Affluent Society”. Galbraith’s warning from the 1950’s has not been heeded – we are now subject to the “market” in everything we do – anything and everything has a price.

 

Sandel cites many examples – such as someone selling their organs, someone saving a place in a queue, schools being sponsored by companies and many others.

 

It could be argued that it was always so. Slavery, the selling of humans in the marketplace, was a common market phenomenon and still exists. Bribery and corruption – the selling of favours or ensuring something goes in your favour – remains common and Iraq and Afghanistan are riven by corruption on the grandest scale. Russia and much of Eastern Europe are held to be gangster nations – like much of the USA in the time of prohibition. Somalian pirates resort to kidnapping as an outcome of pure economic theory.

 

Yet, society does, from time to time, attempt to apply limits in a world where it seems that everything has a monetary price.

 

Market domination

 

The libertarian view that the market should be allowed to rule means that we abrogate our responsibilities. It is the role and duty of civil society (usually through Government) to judge where market rules and where other forms of decision-making are paramount.

 

We make those judgments continually. The right to be safe on the streets is, in most developed societies, made possible by laws which are enacted through general agreement by citizens. It is enforced, where needed, by legal systems and enforcement agencies – again, only there by the general agreement of civil society. In those countries where the market and price dominate, then the danger is that laws and police forces can be bought off. This is the case in many eastern European countries and many countries in Africa. Bribery and corruption rule through what may be called the market society – against the agreement of most of its citizens. As Sandel points out, this is against the best outcome for society – and by a long way.

 

Libertarians may argue that a legal system and an “open society” are the foundations for market economies to work, but the world is a global economy and it is no longer possible for one country to be cut off from the rest. The market domination into so many areas of life is a threat if basic norms do not exist.

 

The market versus societal norms

 

Sandel does not go too much into how society develops its norms – where market pricing should not intrude. We are in danger, of course, of taking on pricing into every form of our lives and there are plans to price our natural resources and to ensure that accounting incorporates aspects of social life into accounting rules – for example, through the Prince’s Accounting for Sustainability Project; through the Natural Capital Committee – which will report into the UK Government’s Economic Affairs Committee, chaired by the Chancellor of the Exchequor.

 

While this acknowledges the problem in one respect (i.e. we are not properly accounting for externalities like pollution, the loss of natural capital – our rivers, forests and such) it is perhaps giving up the struggle against the market society. By the very nature of accounting in terms of numbers for such “externalities”, we subscribe to the essential condition for market pricing of everything – the market society is allowed to dominate.

 

Our focus on GDP and numbers betrays a failing of society – our inability to see anything outside of numbers – so-called economic wealth. GDP, which rewards only that which can be measured, has been a poor simulation of real “wealth”. Our drive to economic success (measured by how many unnecessary items we make and buy) takes no account of what is really important. Ability to buy is all that “counts” – literally.

 

Societal norms are now up for sale. Instead of a rearguard action against the market society (as against market economics) where we defend those areas of society against pricing (as they should be beyond price), we succumb to pricing everything. This leads to everything having a price – an accounting-driven doctrine, a market society doctrine.

 

Beyond economics

 

Of course, this may be the price (!) we are paying for economic growth and relative economic success. As we become more economically successful and as the world derives basic economic success, maybe our brains are becoming hard-wired to numbers as the only register of what is successful. The left-hand side of the brain is assuming victory over the right.

 

There is no question that the discovery of numbers has made the human successful and to understand and control large areas of science. We have changed the world entirely. Our ability to count is now dominating our lives. Since the dawn of accounting (when we counted our grain), numbers now “account” for everything.

 

Where has been the debate to question the way we account? If numbers dominate everything we do, what outcomes do we envisage, what changes result? If all our successes depend on numbers, then what lives will we lead?

 

This is now beyond economics – which, as George Soros has recently outlined, http://www.georgesoros.com/interviews-speeches/entry/remarks_at_the_festival_of_economics_trento_italy/

has been shown to be terribly mistaken in its misunderstanding of the world. His analysis, that economics, in trying to copy the rules of science has travelled the wrong path. Economics is a social science and, as such, does not have definitive outcomes. But, the situation is worse than Soros makes out.  Macroeconomics is being subsumed beneath a torrent of numbers so that, worse than following a quasi-scientific path, we are now following an accounting outcome for everything.

 

Where are the norms for society? Who are the guardians?

 

The financial crash of 2008, which is still playing out in 2012, opened up severe cracks in our economic system. It is also opening up divisions in society between the very wealthy and the large swathe of middle-income earners who make up most of civil society. These divisions show how we are valuing society and show clearly that pricing is not working. The value given to bankers and bonuses (no risk activities for the individuals who can only lose their jobs, not their wealth and no risk activities for the banks, who are too big to fail) shows a dramatic failing in pricing – in which we apparently put all our trust.

 

Pricing mechanisms are not working successfully, yet we place more and more of our faith in pricing as the only arbiter of success.

 

We now price (or will soon be attempting to price) everything – from CO2 to education, from healthcare to shoes, from our rivers to our right to pollute – everything with a price.

 

Yet, macro-economics (the economics of society) is a social science – it is not based on rigid rules. It is (as Soros rightly states) bound up in decisions and thoughts of men and women.

 

Pricing is one outcome of a social science that is not unquestionably right in every case – it is actually, mostly wrong and most economists are only good at describing what has passed (i.e. rear view mirror gazers).

 

Accounting was originally a micro-based activity – to help regulate and tax individuals and firms. It is now being used to price everything.

 

Are there any alternatives to pricing everything?

 

Of course there are, but it is becoming tougher. The Bribery Act in the UK (following a mere 34 years after the Foreign Corrupt Practices Act in the US) is an example. Society has (at least in the UK) decided that winning contracts or influencing economic decisions should not be subject to corruption. In China, as Jonathan Fenby’s excellent “Tiger Head Snake Tails” so ably describes, bribery and corruption have existed for many years but (at least at home) it is not considered acceptable. In many other countries in the developing world, it is.

 

But, we know that price is in play throughout society. The best lawyers cost huge sums and only the wealthy can afford them – so, our legal system is subject to pricing. The best education is paid for; the best healthcare is paid for.

 

With wealth divisions becoming wider, pricing is everything. It is time for a real debate in society on how economics needs to be changed to reflect reality and how accounting for everything (and a price for anything) may not be the answer. The invisible hand of the market should not be allowed to grab everything.

“Everyone should be allowed to bribe”

I had an interesting discussion the other day at a Fundraising event. Sitting opposite me was a businessman who also does a tremendous amount of work for charity. We got into a discussion on corruption – specifically, bribery. The discussion centred on how “the Bribery Act was causing business a lot of trouble” and that the UK “as always” was taking it seriously whereas other countries would not. We would therefore be undermined and lose business.

I argued differently. Working for Global Witness since 2007 (I left in late 2011), I had played a small part in working to get the Bill into law, then to ensure the guidelines made sense and have since worked with organizations like the Chartered Institute of Management Accountants (CIMA) to provide guidance (I wrote their guidance on the Act) and chaired their Bribery Act conference at St Paul’s Cathedral in 2011.

The businessman, actually a very interesting, successful and intelligent individual, suggested that, to make it fair, “everyone should be allowed to bribe” as much as they liked.

It was a Fundraising event, so not the time for a row – nevertheless, it reminded me sharply about how the world works and how it is split between those who understand the chaos that endemic bribery causes and those that see only the micro-economy (through the eyes of individual businesses) rather than the macro-economic chaos and individual misery that bribery causes.

We live in a disjointed world

I have recently been involved in the filming of a documentary on corruption that will go out later this year. So, although I have left Global Witness (which campaigns against natural resource-related corruption and conflict), I have stayed in touch with the issue.

It is easy when involved within an NGO to forget how business folk (as I counted myself for many years) can disassociate themselves from wider issues. I spent most of my career in business and those who are very successful are completely focused – like an athlete focused on winning a gold medal at the Olympics. The best are relentlessly single-minded in the pursuit of gold – the best business people are similar. This means that they are completely focused on what benefits their business.

This is why the US Chambers of Commerce have been waging a war on the Foreign Corrupt Practices Act (FCPA) for some time. The USA has, since the FCPA was brought into being in 1977, been way ahead of the field in anti-bribery law. This has heated up recently as the US authorities have piled into those who are believed to have breached the Act and, mainly through out of court settlements, have gained hundreds of millions of $ in fines and caused real change in US companies and how they operate outside the US especially.

But, the Chambers of Commerce believe that this puts the US at a disadvantage as other countries don’t have similar laws, they believe, or flout them.

Of course, this is no longer the case in many parts of the world. The OECD Anti-Bribery Convention was signed up to by 39 countries and the Convention is a tough one. As a result, the UK was eventually shamed into all-party support for anti-bribery legislation and the Bribery Act was the outcome – which came into law in July, 2011. It is actually a tougher law than the FCPA – making facilitation payments illegal, for example, and making the bribery of anyone (including government officials) a criminal act if it affects a decision. However, if a company has good processes and trains its staff well (Adequate Procedures), Directors of the company are unlikely to be prosecuted. Let’s face it, the funding of prosecutions is also likely to mitigate against major cases being developed.

However, the Act has led to a large industry being developed in training and in new processes. I was on the working group in the UK that brought in guidance for the not-for-profits (charities and NGO’s) in the UK (under the auspices of Transparency International and Mango) so saw very clearly how every organization (business or not-for-profit) could be affected by the Act.

This new anti-bribery industry has seen a number of lawyers move from the Serious Fraud Office (SFO) to private industry – confirmation if needed for business people that the whole thing is a cash generator for law firms and those in them and nothing more.

The equivalent of the “revolving door” that has been denigrated for years when politicians or civil servants enact laws or make project decisions and then move to senior positions in companies, is now taken as a serious concern by business people who see the same situation used against them! There is an irony there somewhere.

Corruption hurts

Business people see anti-bribery legislation as a problem. It makes business (in their opinion) more difficult in the same way that early 20th Century business people saw health and safety legislation as a problem. I am sure that many business people in the 19th Century saw government money being used to build the sewer system in London as a huge drain on their wealth and a public use of funds that proved that their wealth creation was being used against them – even if for the public good.

So, it must be galling to see anti-bribery legislation (which is international in concept and which is aimed at benefitting the poor in the poorest countries) put into force. In the USA, business is working to erode the law that has been in place successfully for 35 years – a law that has led the world. In the UK, there is irritation (maybe mounting anger) at the Bribery Act. And its implementation costs.

Business folk (and I was one for many years) see the short term and their bottom line. They find it hard to associate themselves with the wider questions about how corruption transfers wealth from the mass of people to a few – as, say, in Angola; how it ensures that money is spent on items that are not needed – very expensive air traffic control systems  in Tanzania, for example; how it adds to the price that poor nations pay; how nations like Nigeria are completely beholden to corruption as was England in the 18th Century – a nation where every job, every hospital appointment, every legal decision is likely to be subject to payment / bribes. Look at Greece and its current malaise – not paying tax is a symptom of a society corrupted – so much of the economy is bribery-induced – the black market is a corrupt market and leads to short-term benefits and long-term disaster.

Values are not for sale

The Bribery Act is now in place in the UK; the FCPA has been tried and tested in the USA for 35 years; 39 countries have signed up to the OECD convention. Yet, we probably face a bigger problem. The growth of nations such as China, India and Russia face us with enormous challenges as each nation is, in its own way, a centre of corruption.

China has adopted a Confucian posture – hit hard at home to rid itself of the endemic corruption that is at the centre of its totalitarian heart while allowing corruption to exist where it trades – such as in Africa. The Confucian spirit allows it to leave alone the nations with which it does business at the same time as Western nations attempt to apply governance to aid budgets. This is a time of real challenge and western countries should be working more than ever to instill values not just trying to compete for short-term gains. It used to be “if we don’t bribe, the French will”;  now the same phrase is directed at China, Russia and India (the home of www.Ipaidabribe.com).

We should not allow our values to be for sale for short-term benefits even in times of economic stress.

Is Bribery good for Business?

There are examples of businesses that have high values and most do not engage in bribery. Usually, those with the highest values are large businesses that know their CSR will be shaken by reputational problems. It makes business sense not to take the risk – bribery is bad for business.

Medium to small businesses, where the main opportunity for employment growth exists in most countries, are less concerned with CSR – which most think of as meaningless nonsense. Societal issues are way down the list of priorities – international issues are nowhere.

Hemmed in (in their view) by unjust legislation on all sides that seeks to choke off the spirit of enterprise, small businesses fight to survive daily. To them, bribery may be a necessary part of life. So what if people overseas suffer as a result – jobs are created for British firms and if we don’t do it, someone else (like the Chinese) will.

Globalisation in this context means nothing but cheap supply chains, cheap overseas labour and opportunities for exports. Globalisation does not mean we should take account of international problems.

Like 19th mill owners who fought sanitation bills as bad for business, who (in the main) were not interested in the health of their workers, who were only constrained by legal changes, many business people will only react to changes in the law because they are focused on their business and anything that adversely affects that business is bad – by its very nature. Bribery may allow business to take place – if a British company is not allowed to do it, business may well be lost.

Is bribery good for business? Of course not – just like the death of a worker because of shoddy safety systems, just like the gradual reduction in bullying at work because most acknowledge it is not needed – we inherently know that bribery (the corruption of people to make decisions go our way) is abhorrent. The impact is grotesque and cannot be justified even for a few extra short-term jobs.

Relentlessly focused business leaders know that bribery is wrong (at least most do) and, apart from the most extreme libertarians, understand that globalization means that the rules of business engagement are going to be made international. We cannot for long assume that developing countries will, for long, expect to be treated as the working class of 19th Century England. The class structure of international business will, over time, lessen just as we have made changes to our own class structure in Europe and North America and elsewhere.

Good business cannot “allow everyone to be bribed”. It is not just an ethical position, but a business one. Business should be undertaken on a level playing field where no-one bribes – we should be striving to ensure that bribery is minimized not allowed everywhere. Rules or norms are basic for societies to function. In a global society, the norms need to be widely applied. Bribery is bad – we all know it. Business leaders, here and in the USA, should be leading the fight – not over-reacting and running in the opposite direction.