Skip to main content

ACCAPEDIA

 
 
Kaplan Wiki > ACCAPEDIA > Wiki Pages > Corruption and bribery

Corruption and bribery


 
FavoriteFavorite
Click on the link to subscribe to the page and add it to My Subscriptions view.
Subscribe to e-mail alert notifying.
View feeds on this page.
|
DiscussionsDiscussions
|
Print
|
Export to Word
Export to PDF
 
History
|
Incoming Links
Contents [Hide]

Corruption and bribery

 Corruption is now recognized to be one of the world's greatest challenges.

For example, KPMG surveyed FTSE 100 companies in August 2009 and found that two thirds said it was not possible to do business in some countries without being involved in bribery and corruption, yet only 35 percent had stopped doing business there. 

The World Bank has stated that "bribery has become a $1 trillion industry". 

What is corruption?

Corruption is bribery and any other behaviour in relation to persons entrusted with responsibilities in the public or private sector which violates their duties and is aimed at obtaining undue advantages of any kind for themselves or for others.

The main forms of corruption are bribery, embezzlement, fraud and extortion.

Examples include but are not limited to

  • Bribery, including excessive 'hospitality'

    Note: firms are allowed to provide hospitality, promotional or other business expenditure. For example, to provide tickets to sporting events, take clients to dinner, offer gifts to clients as a reflection of good relations, or pay for reasonable travel expenses in order to demonstrate goods or services to clients if that is reasonable and proportionate for your business.

    However where hospitality is really a cover for bribing someone, the authorities would look at such things as the level of hospitality offered, the way in which it was provided and the level of influence the person receiving it had on the business decision in question.

  • Facilitation payments

    Facilitation payments are additional payments to induce officials to perform routine functions they are otherwise obligated to perform. For example, additional payments to customs officials so they prioritise processing the import of your goods.

    The distinction between facilitation and bribery is not always clear. Some countries (e.g. the United Kingdom and Germany) criminalise facilitation payments abroad. Other countries, such as the United States, do not prohibit such payments abroad and have no upper limit for them, although only very low amounts of money would be regarded as facilitation payments rather than outright bribes.

    Note: you can pay for legally required administrative fees or fast-track services. These are not facilitation payments.

  • Buying votes
  • Illicit payments to political parties
  • Misappropriation of public funds

Why corruption is wrong

The ethical argument

Corruption is inherently wrong:

  • It is a misuse of power and position and has a disproportionate impact on the poor and disadvantaged.
  • It undermines the integrity of all involved and damages the fabric of the organizations to which they belong.

The reality that laws making corrupt practices criminal may not always be enforced is no justification for accepting corrupt practices. To fight corruption in all its forms is simply the right thing to do.

The business argument

There are many reasons why it is in any company's business interest to ensure that it does not engage in corrupt practices:

  • Legal risks

    Regardless of what form a corrupt transaction may take, there are obvious legal risks involved. Not only are most forms of corruption illegal where it occurs, but also it is increasingly becoming illegal in a company's home country to engage in corrupt practices in another country.

  • Reputational risks

    Based on the experience of recent years, companies whose policies and practices fail to meet high ethical standards, or that take a relaxed attitude to compliance with laws, are exposed to serious reputational risks. The argument that although what they may have done may have been against the law or international standards, it was simply the way business was done in a particular country is not an acceptable excuse. Nor is it good enough to claim that other companies and competitors have engaged in similar practices.

  • Financial costs

    There is now clear evidence that in many countries corruption adds upwards of 10 per cent to the cost of doing business and that corruption adds as much as 25 per cent to the cost of public procurement. This undermines business performance and diverts public resources from legitimate sustainable development.

  • Pressure to repeat offend 

    There is growing evidence that a company is less likely to be under pressure to pay bribes if it has not done so in the past. Once a bribe is paid, repeat demands are possible and the amounts demanded are likely to rise. Zero tolerance is the only practical solution.

  • Blackmail

    By engaging in corrupt practices, company managers expose themselves to blackmail. Consequently the security of staff, plant and other assets are put at risk.

  • Impact on staff 

    If a company engages in or tolerates corrupt practice, it will soon be widely known, both internally and externally. Unethical behaviour erodes staff loyalty to the company and it can be difficult for staff to see why high standards should be applied within a company when it does not apply in the company's external relations. Internal trust and confidence is then eroded.

  • Impact on development

    It is now clear that corruption has played a major part in undermining the world's social, economic and environmental development. Resources have been diverted to improper use and the quality of services and materials used for development seriously compromised.

Business has a vested interest in social stability and in the economic growth of local communities. It has therefore suffered, albeit indirectly, from the impact of lost opportunities to extend markets and supply chains.

Relevant legislation

It is becoming increasingly illegal in a company's home country to engage in corrupt practices in another country.

The US Foreign and Corrupt Practices Act (1977)

The principle that it is illegal to bribe foreign officials was first established in the US Foreign and Corrupt Practices Act of 1977. This Act gives the Federal authorities power to prosecute companies who have almost any kind of US footprint, not just US firms. 

The UN Convention against Corruption (2003)

Since then, this principle has gained legal standing within the whole of the OECD and in a number of other countries. It is a principle that was universally recognized in 2003, through the adoption of the UN Convention against Corruption.

The UK Bribery Act (2010)

Introduction

More recently the UK Bribery Act 2010, which applies to all UK businesses, overseas businesses with some presence in the UK and UK registered businesses operating overseas, details four offences:

  • Offering, promising or giving a bribe.
  • Requesting, agreeing to receive or accepting a bribe.
  • Bribing a foreign public official.
  • A corporate offence of failing to prevent bribery.

A commercial organisation is now liable for the activities of associated third parties. It will be guilty of an offence when one of them bribes another person with the intention of obtaining or retaining business, or a business advantage for the organisation.

Corporate ignorance of individual wrong-doing will provide no protection against prosecution.

However, it is a defence if you can show that you had adequate procedures in place to prevent bribery.

When did it apply from?

  • The UK Bribery Act 2010 became law on 1 July 2011.

What is the purpose of the Act?

Fighting business corruption by modernising the law on bribery and corruption

Who does it apply to?

The act applies to all UK businesses, overseas businesses with some presence in the UK and UK registered businesses operating overseas.

Criminal liability

The new piece of legislation makes paying or receiving a bribe, bribing a foreign official and failing to prevent bribery at corporate level criminal offences.

Examples:

  • If a senior person, like an MD, commits a bribery offence.    
  • If someone, like an employee or agent, pays a bribe in order to win business for the company, to retain it or to gain a business advantage.

The Act is unusual in that a business can be guilty of an offence if a rogue employee or associate commits an offence even if the management are not aware of or condoned the unlawful behaviour. Because of this KPMG have described the Act as "one of the most draconian pieces of anti-bribery and corruption (AB&C) legislation in the world".

Defence

However, it is a defence if you can show that you had adequate procedures in place to prevent bribery. The Act thus forces firms to look at bribery and corruption as key business risks that need effective corporate governance and control systems to mitigate.

Potential punishments

The Act provides for unlimited fines.

An indication of the potential damage can be gleaned from the £2.25 million plus costs paid by Balfour Beatty in a civil action brought by the SFO (under older legislation) in 2008. This was despite prosecutors acknowledging there had been no financial benefit to any individual employee - and that the offence had taken place up to ten years before. 

Assessing risk exposure

Relevant factors to consider include:

  • The particular country you want to do business in,
  • The sector which you are dealing in,
  • The value and duration of your project,
  • The kind of business you want to do and
  • The people you engage to do your business.

Anti-bribery and corruption (AB&C) procedures

Evaluating AB&C procedures

As stated above, the UK Bribery Act means that many firms will now have to ensure that they have adequate procedures and controls to prevent bribery and corruption. Even for firms outside the jurisdiction of the UK Act, good corporate governance practices would suggest that firms should have adequate control procedures to reduce the risks associated with bribery and corruption.

The UK Act sets out six principles to help a business decide if they need to introduce changes.

(1)  Proportionality.

Any action a business takes to introduce procedures only needs to be in proportion to the risks your business faces.     

(2)  Top-level commitment.

If you are running a business, the Ministry of Justice (MoJ) advises, you will want to show you have been active in ensuring your staff and key people you do business with understand you do not tolerate bribery.

(3)  Risk assessment.

This shows you have considered the possible risks you face as a company, especially if you are entering into new business arrangements.

(4)  Communication.

Communicating your policies and procedures to staff and others who will perform services for you.

(5)  Due Diligence.

Knowing who you are dealing with can help protect business - so it's advised that you do a few checks and ask a few questions before engaging others to represent you in business.

(6)  Monitoring and review.

Examples of AB&C measures and procedures include
  • improved reporting,
  • screening of staff and associates,
  • accounting policies e.g., high-level approval for certain categories of payments,
  • depth of audit,
  • clear and transparent procurement regulations,
  • controls on the setting of prices and discounts, and
  • guidelines for handling major bids.

Other practical steps one can take to assess and mitigate risks include the following:

  • Use simple internet searches to find out about the levels of corruption or bribery in the particular country you propose to do business in.    
  • Consult diplomatic posts for advice.    
  • Consult business representative bodies here and in the relevant country for up to date local knowledge.
  • UK firms can use the Government-sponsored Business Anti-Corruption Portal aimed at small and medium sized businesses involved in overseas trade.

Barriers to implementing AB&C policies

A number of obstacles can be thrown up, or unwittingly created, when implementing AB&C policies:

  • Competitive advantage.

    The most obvious is the belief that new policies are a tedious and unnecessary chore, together with the fear that unscrupulous competitors will break any rule to win.

  • Managerial apathy

    Chief executives and finance directors may argue that they deal with risks every day and do not need new systems to spot bribery and corruption.

  • Off-the-shelf solutions.

    Many firms implement policy and off-the-shelf procedures before (or in place of) assessing their own unique circumstances.

    For example, some companies operating in France have set up whistleblowing hotlines without realising that French law makes them potentially illegal.

  • Corporate structures.

    Decentralised organisations may have more complex issues to address, as do firms with far flung offices.

    For example, many firms with distant operations tend to focus on the needs of the centre, rather than the local operations, making it more difficult to ensure that your sales team in, say, China, is following policy. A silo mentality can also get in the way because people tend to compartmentalise risk - financial, operational etc - rather than considering cross-cutting dangers.

  • "Shadow" hierarchies.

    The real dynamics of internal control are sometimes different from what appears on an organisational chart. Individual employees can wield power well beyond their formal spheres of responsibility. Shadow power networks not only facilitate bribery, they may have arisen in order to conceal it.

  • Excessive pressure to hit targets

    Internal controls can become marginalised in a culture of immediate results.

  • Cultures of secrecy.

    Excessive sensitivity about disclosure can prevent one part of a business from learning about incidents that have occurred elsewhere. Secrecy always works to the advantage of the corrupt employee or associated party.

  • Heterogeneous cultures.

    Problems can occur where any staff do not share the values of the organisation. Such situations can arise from mergers and acquisitions, rapid expansion, poor training of new staff or from inadequate supervision of overseas offices.

Created at 8/15/2012 9:32 AM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 9/27/2013 3:47 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

Rating :

Ratings & Comments  (Click the stars to rate the page)

Tags:

Recent Discussions

There are no items to show in this view.
ACCAPEDIA - Corruption and bribery