What Really Causes Corruption? It may surprise you.
I was recently asked to write a book on Global Corruption for Auerbach Publishing. I am thrilled at the opportunity to share my global experience with other auditors, however while developing the outline I have been spending much time considering the difference between government corruption and corruption in corporations. The more I think about it, the clearer the answer becomes: There is no difference. While I have spent the vast majority of my career in large corporations and have only a sprinkling of government in my background, almost all of the corruption I have encountered around the world involved a government official or entity. Which makes it almost impossible to avoid coming to the conclusion that corrupt governments are to blame. But is it easy for companies to avoid corruption? Is it even possible?
If we look at Transparency International’s Corruption Perception Index 2013, more of the world is labeled as “highly corrupt” than not. So how does an American company abide by the anti-corruption rules and regulations when trying to conduct business globally?
First, I think we need to better understand the problem. And we need to define “corruption” globally. What Americans, and the Western World, define as corruption is not necessarily seen as corruption in other countries. As Americans, we often see corruption as a clearly black or white. An act is either allowed (legal) or not (illegal). But what if our lack of understanding, our ignorance of other cultural norms, is causing our belief system to be in complete contrast to those in other countries?
When I first started traveling internationally as an auditor, I saw everything as black and white too. Then I started gaining experience. Consider these scenarios:
- A division of our company pays $10,000 per month to a local drug cartel for protection at a manufacturing plant.
- A border location between two African countries pays a “passage fee” to the border agents for every delivery between sites on opposite sides of the border.
- A government inspector in an Asian country is paid a “fee” to come inspect a site in order to continue production.
In the early years of my career I would have said all these examples are corruption and the company needs to stop participating immediately. But let’s consider some additional information …
- This plant is in a Brazilian favela (slums) in which a war is raging between two drug cartels. When Brazil cleaned up Rio for the Olympics and World Cup, they cleared out the favelas nearest the tourist areas, pushing the people and the gangs into other favelas. The gang who originally “ran” the favela – a favela’s kind of law and order – has offered to protect our site from the invading gang. We pay, but we also institute a 5:00 PM curfew and immediately start plans to relocate the production plant. We self-disclose our actions to the SEC and proceed to build the new plant as quickly as possible. What would you do? Close the plant and fire 500 people who have little chance of finding new jobs? Not pay and put the welfare of every employee at risk?
Let’s look at the next one…
- This is the only crossing for 350 miles. The border crossing guards carry guns. They know you carry valuable cargo. You need to make this trip 3 times a week to provide supplies to 500 employees at a remote site who rely on your deliveries as they have no other option. The alternate route, which would be a 500-mile trip to go 30 miles, is filled with ruthless militants and bandits. The border control guards actually keep the “bad” guys at bay, making this route reasonably safe. So do you pay the guards who ask just a small fee or take your chances on the dangerous un-policed road known to have violent criminals monitoring it?
Or how about the last one…
- It turns out that in this nation, these government positions are appointed without salary. The inspector is expected to generate his own salary through the “fees” he collects from those he inspects. The inspector and his colleagues are also extremely understaffed and overwhelmed with work due to rapid economic growth in this geographic area. The only way to obtain the legally required inspection is to pay the inspector a fee that we all know goes straight into his pocket. In order to get the inspector there in a timely manner, to obtain the permit necessary, it is necessary to pay him more than everyone else pays him so he makes you a priority. The inspector is a father of 3 and lives a very modest life. The inspection itself is a fair and honest genuine inspection. Go figure.
The situation is almost always more complicated than is initially assumed. What causes corruption to be so high in some countries? You may have already reached your own conclusion, but let’s look again at the Corruption Perception Index. Many of the most corrupt countries are very poor developing nations or have large poverty-stricken populations. Some of these countries do not have the national infrastructure to support solid processes like we have in the United States. Without formal government systems to bill and collect funds and then redistribute to employees (inspectors, border guards, etc.), the process becomes streamlined—payment goes straight to the person performing the work. That looks like a lot like corruption, and creates ample opportunity for fraud. When you take into consideration the root causes for some of acts, things become a lot less black and white and a lot more grey. These causes are certainly things to consider and try to understand when working to protect your organization from corruption. I do not have the answers, as this is a large global issue, however I do believe that knowledge is power and understanding corruption and its causes will go a long way in fighting it.
If you would like to see Transparency International’s Corruption Perception Index you may do so here…