Removing the Corruption Tax on the Private Sector
January 17, 2014
Corruption is a massive tax on the private sector and impedes broad-based economic growth. Sixty-seven out of 144 economies identified corruption as one of the top three challenges to conducting business in their country, according to the World Economic Forum.
Developing economies bear a disproportionate share of the costs of corruption, which impedes poverty reduction strategies. Reducing corruption, which attracts foreign investors, should be a major focus not just of development assistance and diplomacy, but also of trade coalitions and business community efforts.
A new report by CSIS looks at why the business community should do more to combat corruption, the opportunity cost of corruption, and the role that the private sector and other stakeholders can play in combating corruption. Below are some of the critical questions that have arisen through the research.
Q1: How is private sector corruption defined? What are the costs of corruption to the private sector?
A1: Transparency International defines corruption for both the private and public sector “as the abuse of entrusted power for private gain.” The World Bank further elaborates that private sector corruption is particularly destructive as it distorts the allocation of private and public resources for constructive investments, and harms the tolerance of electorates for public officials seeking to make constructive reforms.
There are various estimates regarding the costs of corruption. One of the most influential figures is from 2005 and places the cost between $600 billion and $1.5 trillion. However, this figure included household bribery and individuals.
Measurements of corruption calculated or analyzed in the forthcoming CSIS report, “The Costs of Corruption: Strategies for Ending a Tax on Private Sector Led Growth” only focus on a narrow definition of private sector corruption – limited to the formal, private sector economy with five or more employees. The 105 countries included account for only 22 percent of global GDP. Even given this narrow definition, the numbers are staggering. The cost of private sector corruption in developing countries was above $500 billion in 2012 – representing 3.7 times the amount of global official development assistance (ODA) disbursed.
Q2. What are some existing laws and international frameworks and what role does the private sector play in these frameworks?
A2: Until 1997, the United States was the only country to prohibit bribes to foreign officials. At that point, OECD member countries also agreed to prohibit private-sector bribery through the 1997 Anti-Corruption Convention. Non-OECD countries soon followed suit. In 2005, the prohibition on bribery was globalized through the United Nations Convention against Corruption, which to date has been signed by 168 countries. Today, countries as diverse as the United Kingdom, Russia, South Africa, China, Vietnam, Mexico, and Brazil prohibit private-sector bribery through national regulations. Brazil, for its part, responded to this trend by enacting the Lei Anticorrupção (“BACL”) which will become effective on January 28, 2014 and will impose a strict corporate liability for acts of both employees and agents to all legal entities with operations in Brazil. Another excellent example is the UK Bribery Act, which condemns all types of bribery, including the corporate offense of negligent failure to prevent bribery.
The EU Public Procurement Directive of 2004 requires member states to adopt laws that exclude bidders that have been convicted of fraud from bidding for government procurement contracts. It goes a step further and also excludes businesses considered to have conducted “grave professional misconduct.”
The proliferation in recent years of anti-corruption transparency pacts and strategic global frameworks has included an increased recognition, and also an increased role, of the private sector in any multi-stakeholder initiative to combat corruption. International actors recognize the deeply interrelated nature of public and private sector corruption and acknowledge that addressing corruption issues in the private sector is of equal importance as the public sector.
For example, the World Bank Institute launched the Open and Collaborative Private Sector Initiative to increase the impact of the private sector in anti-corruption and development efforts. In 2010, the World Bank also launched the annual International Corruption Hunters Alliance (ICHA) to leverage new technologies such as crowd sourcing and mobile applications with citizen engagement and multilateral partnerships to combat global corruption.
Some private sector actors have taken steps to reduce corruption in their supply chains as a way of protecting their bottom lines. However, challenges around implementation continue to hinder anti-corruption efforts.
The World Economic Forum’s Partnering Against Corruption Initiative (PACI) was established in 2004 and brought together CEOs from roughly 150 major corporations to publicly declare their commitment to increased compliance, high-level dialogue, and to implement a set of anti-corruption measures.
The United Nations Global Compact (UNGC) – which includes anti-corruption as a governing principle-- was established in 2003 with the endorsement of private sector and government stakeholders. The over 5,300 signatories vary widely, from smaller businesses to international corporations from 135 countries. The UNGC incentivizes these members to set anticorruption standards that involve working with their governments to develop concrete policies to uphold these, and to set standards for those in their supply chains, which includes training employees to reduce liability risk.
Private sector actors are also becoming involved in sector-specific, multinational initiatives like the Maritime Anti-Corruption Network (MACN) and the Construction Sector Transparency Initiative (CoST).
Q3. What challenges do anti-corruption programs face?
A3: There are four main challenges that all anti-corruption initiatives face:
1. The effective implementation of best practice standards and the ability to apply punitive measures in the case of national anticorruption laws such as the FCPA. This is especially difficult when companies are conducting business in a number of other countries. A Kroll survey found that forty-seven percent of participants reported that they conduct no anti-corruption training with third parties. According to the survey, 18 percent of respondents say they either have an anti-corruption policy but don’t require employees to read it, or don’t have an anti-corruption policy at all.
2. The challenge of implementation continues to be a problem for both multi-sectoral initiatives and business coalitions. Even the UNGC does not have an effective monitoring mechanism and has only recently moved toward raising implementation standards. As of 2012, only 40 percent of the world’s largest 500 global companies and only 10 percent of multinationals have signed. Following increasing attention on compliance, 4,000 businesses were removed in 2012 due to noncompliance.
Separately, business coalitions are member driven and cannot take effective punitive measures beyond removing non-compliant members from their coalition.
3. The challenge of changing the incentive structure of people and companies that benefit from corruption. Multilateral and multi-sector initiatives work with governments on the demand and supply side of corruption. However; implementing global initiatives on a local level is especially difficult given that there are individuals who benefit from corruption within the very governments where efforts are being made to reduce corruption. Although there is a growing consensus regarding the bottom line and reputational costs of corruption costs for companies, many companies operating in poor regulatory environments continue to engage in corruption.
4. The challenge of identifying who will pay the costs of implementation and changing incentive structures of corrupt actors. Several developing countries that recognize corruption as an impediment to doing business in their country have limited and overstretched resources. On the private sector side, large companies that are well established in markets where certain corrupt businesses also operate, also have less of an incentive to cover the costs of implementation or changing incentive structures.
Sadika Hameed is a fellow with the Program on Crisis, Conflict, and Cooperation (C3) at the Center for Strategic and International Studies (CSIS) in Washington D.C. Jeremiah Magpile is program coordinator and research assistant with the CSIS Project on Prosperity and Development.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2014 by the Center for Strategic and International Studies. All rights reserved.