Business and bribery – globally speaking

A couple of weeks ago, I posted “Everyone should be allowed to bribe”

https://jeffkaye.wordpress.com/2012/05/27/everyone-should-be-allowed-to-bribe/

and received a lot of good feedback. From business people, from NGO’s, from those in countries where the bribes take place and impact the most, it is clear that this is a major concern.

The NGOs’ position is understood – bribery is bad, it is illegal in most countries, it does irreparable harm, it distorts the market, and it creates poverty in those countries, which cannot afford to exacerbate intolerable economic conditions.

For those in those countries where bribery takes place, the impact is felt acutely. It is not just that money is wasted on bribes that could be spent elsewhere; it is not just that money is wasted on products and services that are bought only because of the bribes. Just as critical is the fact that the country may see bribery and corruption as the norm – nothing is done without a bribe – it is a mafia-type culture where favours and reward for favours are the norm. This is a distortion of the market that leads to those in certain positions benefitting and the rest (those outside the inner circles) are deprived of economic well being (maybe no housing or food) and deprived of being part of a moral centre to their lives.

The Business of Bribery

For large businesses operating out of countries with well-developed legal structures, bribery and corruption is now officially not on the agenda – reputational losses are, in the main, far too severe to allow a short-term gain to be allowed if through bribery. The problems that Wall-Mart is suffering from alleged facilitation payments in Mexico is a case in point – the legal hassles, the continuing publicity, the constant press all drain the company and, overall, question the economic sense of the payments (which may well not be illegal under the Foreign Corrupt Practices Act – FCPA).

For large organisations operating in corruption-endemic parts of the world, the situation is fraught with danger. A business operating in the UK or USA, for example, would be acting illegally if bribing overseas. Yet, there are many instances where it appears that business takes a calculated risk – using money to influence decisions that (even if found out and prosecuted) may well represent a reasonable return on investment overall. These companies may well be in mining or construction, or defence – industries prone to bribery opportunities where the dangers are continuous.

For small to medium-size enterprises (SME’s), the situation is hugely risky. Many complain that meeting the requirements of the UK’s Bribery Act are severe and highly costly. Lawyers require large fees for sifting through the processes of any business to “ensure” that “Adequate Procedures” are in place. Many have gone too far and maybe spending too much in ensuring no bribery takes place.

For others, there remains the feeling that bribery is not a bad thing – it is the norm, they say, for doing business in certain places and British business (or American or whoever) should not be crowded out by parsimonious governments led by the nose by the NGO’s.

For these businesses, they are competing for the survival of the company (in their minds) – why does the UK not “get it” – that “we are not on a level playing field with the Chinese and others who allow their firms to do what they want when overseas?” Arguing that it is unethical produces a wry smile – and a call to deal in the real world where business is tough and economic conditions tougher. A business does whatever it needs to do.

From 19th Century business ethics to 21st Century Globalisation

A parallel with the business of bribery was the rise of industry in the 19th Century and how the demand for health and safety procedures were crowded out and resisted by businesses that saw this as an affront to their rights to do business. The laws allowed child labour and working conditions modeled on workhouses – prison-like conditions.

In 1833, the UK introduced a law that ruled that:

  • Children under nine could not be employed in textile factories.
  • Children aged nine to thirteen could work a maximum of nine hours per day and 48 hours per week.
  • Young persons aged thirteen to eighteen could work a maximum of 12 hours per day and 69 hours per week.
  • Night work for children and young persons was not permitted.
  • Children were to attend school.
  • Four independent factory inspectors were to be appointed.

This was the beginning of a movement that business owners felt would wreck their businesses.

We can now look back on the waves of pressure in both directions that pushed for better working conditions on one side and the status quo on the other.

But, the world changed – developing countries realized that to be prosperous meant developing the so-called middle class and that all parts of society had to be covered – not enslaved by appalling conditions. While risks still persist in many industries in the UK and other developed nations, the focus has moved.

Globalisation has meant that we now source so much of our goods from overseas and this means that Asia, for example (mainly China) now represents our supply base just as the under-9’s did before 1833. Our natural resources (from which the British Empire rose up) are still derived from many of those countries, which were plundered in the 19th Century.

Yet, the norms that we require in our own countries are not the norms in our supplier base – even if we obtain the benefits. When a UK retailer is discovered using child labour in one of its overseas suppliers, there is an outcry and their reputation suffers. Our consumerism does not, in the main, take precedence over what we see as basic ethical norms – which have changed in the last 180 years.

So, bribery and corruption is no different. Early 19th Century England was a place where bribery was endemic. We have, for the most part, cleaned up our act at home. This ethical state was not transposed to the work we do overseas for many years – in 2001, the costs of overseas bribes remained tax deductible in the UK. Now, the situation has changed – the ethical state has changed in law – if not yet in practice. Globalisation does not mean we should hide our eyes from the rest of the world – we are now all part of the same economy (just as the textile workers and their 9 year-old children were in 1833).

Taking business beyond bribery

The laws are in place but business (operating under difficult economic conditions) and business people feel under pressure. Passing a law does not mean that it becomes easy to deal with it. There are a number of changes that we need to see made.

  1. SME’s feel under pressure because they have been scared by the Adequate Procedures requirement in the UK – which means that individual Directors are unlikely to be prosecuted even if someone in their firm is guilty of bribery if there exist processes, which mean that the bribery charge is shown to focus on a rogue element. Lawyers and others have made the most of this – firms are hit by high charges if their risk assessments show them vulnerable. The answers lie in common sense (like all business decisions) but also, for many who think themselves vulnerable, for Chambers of Commerce and other business organisations (CBI, IOD) to go to their aid by working with government and NGO’s (like Transparency International) to educate wherever possible.

I have myself chaired conferences in the Bribery Act – I hesitate to state the percentage of companies that have been to such conferences, but I bet it is a low one.

2. Working for a US corporation for many years, I had to sign-off every three months that I was unaware of any bribery going on in my business. We should have the same in the UK – this should be done for all companies audited, where a document should be signed off every year by the Board. For those companies that are too small for an audit, there should be a statement that is sent in with the Balance Sheet to this effect.

3. For companies that are subject to bribery requests and / or intimidation, there has to be somewhere to go just like the Embassy if an individual is imperiled. Every embassy should have a commercial attaché or equivalent that is trained in the Bribery Act and knows how to deal with the issue. This entails pressure on host governments as well as alerting the issue to UK Authorities – as it is anti-competitive and will hurt British firms in the short-term. It also requires links between the Embassies and industry groups to channel information and to act on it.

4. The Governments that are signed up to the OECD Anti-Bribery Convention have to seriously and continuously pressure those countries that aren’t to enter into a world wide anti-bribery agreement – it should be a WTO requirement for trade that countries make their firms bribe-free and that supplier nations work towards bribe-free regimes. This should also include those regimes that have surpassed bribery and where small groups have taken over the resources completely. Angola comes to mind (Sonangol controls the energy industry and is vitally owned by the governing clique) but South Sudan (one of the poorest nations on earth) is bemoaning the loss of $4 billion through corruption in its oil sector.

Business Ethics good for Business

Business has to deal with many challenges – and external challenges can be the hardest. I have seen businesses in aerospace and defence positively transformed because of the adoption of good ethical practices. CSR has focused many large companies on to going beyond what is legally required to what is right. That usually makes for good business as consumers are far more “savvy” and can change their buying habits very quickly.

For small businesses (maybe part of a supply chain where the end-consumer is not in sight), it is just as important. Large companies are responsible for their supply chain, too under the Bribery Act. There is not much escape.

The Bribery Act took 200 years to get into Law – it is very unlikely to be overturned. The 21st Century world is one economy – each nation and group of nations are linked by trade flows, supply and demand, financial flows, people flows. Just like CO2 emissions, one country impacts another. Bribery may be an unseen crime – it is a crime nonetheless, but, like in regard to health and safety (and child labour laws) we move on.

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Sudan – China’s Supply Chain Gang

George Clooney got arrested yesterday – outside the Sudanese Embassy in Washington, DC. He was freed with a $100 fine – but he (and his journalist father) have brought some attention to the awful situation in Sudan / Nuba / South Sudan.

I was in Khartoum in 2010 on behalf of Global Witness, an NGO that campaigns against natural resource funded corruption and conflict. The Sudanese had reacted badly to a report we had written on how oil resources were being corruptly handled against the interests of the South Sudanese – who have since gained independence. Around 98% of the income is from oil.

At the conference organized in Khartoum by the Sudanese Government – and aimed at rubbishing the Global Witness report – the oil companies were represented (Chinese at the forefront) along with the Government and oil ministries. The conference was aimed at whitewashing the Sudanese of corruptly taking more than their fair share of the oil under the oil sharing agreement.

Since then, Bashir’s Government has been syphoning off South Sudanese oil (which has to run through Sudanese pipelines).  Because Sudan is made up of various tribes, fighting over territory and natural resources remains continuous and high-risk. As in many countries, economic well-being is a necessity to ensure that such conflict is minimized. In a country riven by wars and dependent on one natural resource, oil, oil management and an ending of the rampant corruption in Sudan and South Sudan are critical.

19th Century Boundaries

Sudan is a nation with boundaries set up in the 19th Century by Empires that adored straight lines and cared little and understood less about the tribal affiliations or histories of those lands. Kept together by undemocratic and repressive regimes, corruption and conflict were devices developed to hold strong elites in power. Corruption is now rampant throughout the region and conflict is often seen not just as a means to take over territory but to keep populations focused on the enemy so as to distract them from internal strife and to motivate all against a common foe.

Decisions taken many years ago by foreigners have destabilized the region and insinuated a corrupt regime and continuous conflict into it. The new colonizers, though, are the Chinese. As George Clooney states, the Chinese oil companies (really the Chinese Government) have invested over $20bn in Sudan / South Sudan so that 6% of their oil needs back home can be fed. They have styled their colonialism on the back of “no involvement” in politics or in the affairs of the Sudanese. Confucian disinterest in the affairs of a nation so far away means that the west’s plans (certainly since the end of WWII) to link economic prosperity (mainly through aid) with improved governance are now foundering as the new colonialists (extracting vast quantities of natural resources) care nothing about governance.

21st Century Payback – China at the centre

Following the demise of the League of Nations after WWI (a bastion of 19th Century borders), the United Nations was created to establish peace worldwide. How will the 21st Century be reshaped to deal with the enormous economic changes taking place whereby dominant nations from the 20th Century are being progressively sidelined in those areas of greatest economic need and highest risk of conflict?

China despite its size and annual economic growth remains a poor country where 70% of its people are poor by international standards. It is determined to grow itself to a level where its people are comfortable and where the political system is salvaged. This means that its supply chain (especially its natural resource supply chain) is seen as merely that – it doesn’t matter that nations who have the natural resources so badly needed for economic growth in China are corrupt and riven by war as long as the Chinese can minimize supply disruptions. This may have been OK in the 19th Century but is not sufficient now where elites are enriched in the supplier nations on the back of corruption and conflict.

The key to the crisis in Sudan and the key to making a real change to 21st Century struggles against corruption (and its impact on poverty, hunger and disease), against conflict and against world-changing disasters like climate change is ………China.

Whether or not China is dominant in terms of its economy – and it is still much smaller than the USA – it has the power of veto and, more positively in terms of persuasion.

China can free the Supply Chain Gang

Whilst economic strength moves to China at great speed, the Chinese government has to take account of the fact that its customers and suppliers and itself are completely interdependent. China will probably over time become the most interdependent nation on this planet. Its huge population and increased momentum for economic growth will encounter limits that the current Premier, Wen Jiabao recently acknowledged. Increasing “reform and openness” are critical to further economic progress, he said recently in Beijing.

As out-going Premier he will not in the future have the power he currently possesses and Chinese power is entangled in many ways so that his words may not bear fruit. Nevertheless, there is some reason to believe that the government in China may seek to adapt as time goes on – because economic progress is vital to secure the political power base. At the same time, it is possible to see that (with the right pressure) Chinese attitudes to its customers and suppliers may be reformed to more than purely customer / supplier status. China is not a corporation and the competition for natural resources is not merely a supply chain activity – there are lives at stake within the supplier communities, not just shareholders and shareholdings.

Sudan and South Sudan are examples of so many things – countries dependent on a natural resource which is dissipating that basic wealth to a foreign country so that a core of wealthy and powerful government cadres get wealthier while thousands live in poverty, disease and in war zones. While China treats Sudan and South Sudan on a supply chain basis, no change can exist – and this same treatment is expanded wherever China works to secure supplies.

The Clooneys and Amnesty International and Enough (as well as organisations such as Global Witness) are working hard to free the Sudanese and South Sudanese from the terror of war. It is also a crucial case for expansion of China’s role in natural resource extraction and dependency. China can change the way the world works by relaxing is grip on pure supply economics and allowing its huge economic strength to persuade its suppliers that good governance is a worthwhile benefit along with the extraction of its natural resource wealth.

Holes in the ground – whether the result of mining, oil extraction or graves dug to bury the dead from conflicts – are no use, merely the result of the supply chain gang effect. It is a good time for China to take its global responsibilities more seriously. It will be around for a long time – it should be seriously acting on how it lives within the global neighbourhood. The traditional Chinese view that you should follow the local custom when you go to a new place is outmoded – especially when local customs are keeping elites in power, corrupted and financing conflicts.