Over centuries, human society has achieved remarkable progress. Just an example: only 3-4 centuries ago people went for fun to public executions, as they go now to football matches! Now death sentence is only practiced in very few countries. We have become more humane, more civilized, even more rational, but are we also acting more responsibly and ethically?
Unfortunately, there is no simple, affirmative answer to this question. Namely, we are systematically destroying our planet, and with very few exceptions, corruption is still practiced in many domains of public life. In 2004 Daniel Kaufmann, Global Governance Director of the World Bank Institute, estimated the volume of corruption related to public procurement was about 1 trillion USD, and nowadays it could be double. Till rather recently some economists have even publicly defended this practice as an unavoidable aspect of doing business, while international bribing in most countries still isn't effectively criminalized, and companies' bribing expenditures remain in many countries tax-deductible!
This is not only highly regrettable, it is becoming unacceptable. Fortunately, the ethical and political aspects of corruption are increasingly discussed in the public. Corruption is being recognized as clearly dysfunctional and inconsistent with the high complexity and interdependence of modern socio-political and economic systems, and it is considered as one of the biggest challenges humanity is facing in the early 21st century.
Research has demonstrated the scope of the negative impact of corruption on many societal domains, including biased decisions, reducing economic growth, and causing illegitimate redistribution of public assets.
From international to local level there are many efforts to develop regulatory, political and moral pressure to prevent, or at least strongly reduce corrupt behavior. The questions remain as to why the results in most countries are still far from satisfactory, why is it so difficult to eliminate corruption, and which are the main culprits responsible for the situation?
As usual, the culprits are never just on one side. The political and administrative sphere is usually on the receiving side – which is obviously a crime, but very seldom proven and prosecuted. The other key actor in corruption is business (pushing for some advantages in the regulations to be adopted, or getting some fat public procurement contracts) – offering bribes to decision-makers and public officials – which is a crime as well – at least at the national level. Change is needed on both sides, and the public should be more active in opposing corruption, instead of being indifferent and often feeling helpless.
Unfortunately with the liberalization processes – being introduced in so many countries in order to reduce the cost of public administration – there are strong indications that corrupt practices did not decrease, but in many environments even increased. This means that the actual level of responsibility on the part of stakeholders is lower than required and expected, and secondly, that inspection and monitoring systems are underperforming. Both can and should be improved, and that is needed if we want to function corruption-free and thereby more sustainably.
Definition of corruption and its impact
Transparency International’s definition of corruption is rather simple and straightforward: “the abuse of entrusted power for private gain”. It covers more than financial gain and includes illegal access to non-financial advantages – which can happen only due to lack of transparency in public administration, in politics, as well as in business and elsewhere.
We are concerned here particularly with the following impacts of corruption:
- economic impact: increased general transaction costs, lower economic growth, unfair secondary redistribution of national income, destimulating FDIs, and reduced predictability in business decision making;
- political impact: abuse of authority by senior decision-makers in all domains, particularly in the executive and legislative branches – but not excluding the judiciary, and lower electoral and general political participation due to lack of trust in key institutions;
- social impact: additional socio-economic differentiation of population and increased share of economically disadvantaged people, who cannot afford to pay for the services – being thereby socially discriminated;
- systemic impact: corruption leads to and facilitates decisions which are contrary to the legitimate, logical and fair governance procedures at national or local levels.
Many of these impacts are not purposefully intended by the people involved in corrupt practices, though they are aware of them, but still act corruptly, as they abuse public trust and exploit their positions for their private gain – knowing that they are acting illegally and damaging public interest.
Research has proven that countries characterized by corruption tend to have lower economic growth, and are attracting less FDI than other countries (China, India, and the Russian Federation are exceptions due to the sizes of their markets and low labor costs).
Generally, stable and efficient democratic countries leave less opportunity for corruption than others. However, none of them have achieved the present enviable status overnight, but through decades and centuries of consistent efforts at a legislative, political level, as well as by nurturing values of transparency and personal integrity, as pillars of traditional culture. Not only are these countries rewarded by favourable economic performance, political stability, with institutions enjoying popular trust. Equally important, their citizens are enjoying higher levels of wellbeing and consequently feel happy and secure.
Claiming that corruption simply isn't compatible with a good society, Michael Scaldini (2016, p. 2) has developed an interesting concept allowing the measurement of corruption's impact on the quality of governance by referring to the degree of bias in policymaking - going against the public interest.
It is not the purpose of KEN Briefs to discuss in detail the theoretical aspects of the subject, but if any reader is interested in them the book The Social Construction of Corruption in Europe edited by Angelos Giannakopoulos is recommended. Besides the theoretical background and broader societal-cultural implications of the phenomenon, several country case studies are presented as well.
According to the latest annual Perceived Corruption Index Report, prepared by Transparency International, among 180 assessed and ranked countries, the least corrupt countries are: Denmark, New Zealand, Finland, Singapore, Sweden and Switzerland, while the most corrupt are: Venezuela, Yemen, Syria, South Sudan, and Somalia.
Legislative efforts against corruption
Although corruption of national officials is a criminal offense in most countries, transnational bribery is generally not yet. Making international corruption a crime will require changing laws and introducing mechanisms to effectively enforce them. Both will require parliamentary support and enforcement machinery. Most countries have been reluctant to act unilaterally for fear of jeopardizing the business interests of their nationals by subjecting them to more stringent standards of behavior than their foreign competitors.
The efforts of international organizations are directed at the criminalization of corruption. Most common forms of corruption, such as bribery of public officials, are already a criminal offense in many countries. So far, only the United States has adopted the Foreign Corrupt Practices Act already in 1977 to specifically criminalize international bribery, but its efficient implementation remains a challenge since the MNCs always find a way to do it, without being sanctioned.
Corruption is an international problem which requires also international measures and solutions. Lots of big corruption occurs in international business, including international government procurement, where the World Bank and other financial institutions have a special interest. To be successful, efforts to reduce this kind of corruption must deal with it at its source in capital-exporting countries, as well as in developing countries – where projects are being often carried out by foreign companies. Work along these lines is being carried out by international organizations, particularly regional organizations, and by international business groups. However, actual progress is achieved rather slowly.
Current international initiatives
International organizations provide a forum in which to agree on common definitions and standards, and on coordinated actions addressing corruption. There have been numerous initiatives in many organizations, often under external pressure, but accompanied by insufficient determination to act effectively (though member states are the ones to act in the first place). Perhaps it is primarily about creating a favorable public image of the organizations concerned, than anything else?
The United Nations. In December 1996 the UN General Assembly adopted a Declaration against Corruption and Bribery in International Commercial Transactions, as recommended by the ECOSOC. Although not legally binding, the Declaration's wording on criminalizing foreign bribery and ending its tax deductibility signifies broad political agreement in the international community on this matter. In February 1996 the UN General Assembly recommended that the ECOSOC should take steps to prevent illicit payments.
The UN Global Compact is a non-binding United Nations pact to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The UN Global Compact is a principle-based framework for businesses, stating ten principles in the areas of human rights, labor, the environment and anti-corruption.
- Businesses should support and respect the protection of internationally proclaimed human rights.
- Make sure that they are not complicit in human rights abuses.
- Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining.
- The elimination of all forms of forced and compulsory labor.
- The effective abolition of child labor.
- The elimination of discrimination in respect of employment and occupation.
- Businesses should support a precautionary approach to environmental challenges.
- Undertake initiatives to promote greater environmental responsibility.
- Encourage the development and diffusion of environmentally friendly technologies.
- Businesses should work against corruption in all its forms, including extortion and bribery.
OECD Working Group on bribery
The OECD initiative started in 1994, has encouraged member states to end the tax-deductibility of bribes and to criminalize the bribing of foreign officials. In 1996 the OECD Council adopted a recommendation on ending tax deductibility for foreign bribery, and member states, within the framework of their laws, are amending legislation accordingly. At its ministerial-level meeting in May 1997, the OECD Council endorsed the Revised Recommendation on Combating Bribery in International Business Transactions, prepared by the OECD Working Group. In particular, the Ministers reaffirmed their commitment to criminalizing bribery of foreign public officials in an effective and coordinated manner. They recommended that member countries submit criminalization proposals to their legislative bodies by April 1, 1998, and seek their enactment by the end of 1998.
In the European Union, the Commission has adopted in May 1997 a Communication to the Council and the European Parliament on a Union Policy against Corruption. This communication sets out the EC's comprehensive policy on corruption inside the EU, as well as in its relations with non-member countries. The communication deals with a wide range of actions, including the ratification of conventions criminalizing the corruption of EC officials and officials of member countries, eliminating the tax-deductibility of bribes, reforming public procurement, accounting, and auditing systems, etc. In the case of non-member countries, the communication proposes to "establish a coherent anti-corruption strategy in the area of its cooperation with third countries which benefit from EC assistance or have concluded cooperation or assistance agreements with the EC “...and to establish special anti-corruption programs, particularly in the applicant countries of Central and Eastern Europe.”
The Council of Europe has launched in November 1996 a Programme of Action Against Corruption, prepared by the Multidisciplinary Group on Corruption, and being adopted by the Committee of Ministers. It serves as the basis for the preparation of a convention on corruption under which parties would agree to legislate and if necessary to criminalize certain corrupt behavior. In addition, the Group has undertaken work on the administrative and civil law aspects of corruption. The Council of Europe also provides technical assistance to its Eastern European member countries in dealing with corruption issues.
The Organization of American States' Convention
The most advanced effort so far is the OAS Inter-American Convention Against Corruption, adopted in Caracas, Venezuela, in March 1996. Twenty-three of the OAS' thirty-five members have signed the convention. Building on the convention, the OAS General Assembly adopted a comprehensive Plan Against Corruption at its meeting in Lima, Peru, in June 1997. Under this plan, the OAS will provide support to its member countries and cooperate with local populations and other international organizations - including the World Bank, the Inter-American Development Bank, and the OECD - in preventing and controlling corruption.
International Business Initiatives
In March 1996, the International Chamber of Commerce (ICC) issued the revised Rules of Conduct to Combat Extortion and Bribery in International Business Transactions. The rules prohibit extortion and bribery for any purpose. They also recommend the implementation of the 1994 OECD recommendation on curbing bribery in international business. The rules are not binding on ICC members, but corporations may endorse them voluntarily. To promote the new rules, the ICC has set up a standing committee of business executives, lawyers, and academics.
Nongovernmental organizations around the world are participating in the efforts of local governments and other entities to curb corruption. Among the international NGOs, Transparency International (TI), based in Berlin, Germany, aims to curb corruption through international and national coalitions encouraging governments to establish and implement effective laws, policies, and anti-corruption programs; build public support for anti-corruption programs, and enhance public transparency and accountability in international business transactions and public procurement; and encourage all parties to international business transactions to operate at the highest levels of integrity, guided by TI's Standards of Conduct. Transparency International, having more than 70 national chapters that fight corruption at the national level, it has contributed significantly to making corruption a public issue in the press and elsewhere and is cooperating with international organizations in actions against corruption.
A challenge even for Switzerland
On 29 November, the Swiss Responsible Business Initiative was rejected. While the initiative received 50.7% of the popular vote in the referendum, it only gained 8.5 of the required 12 regional majorities across Swiss cantons. The reporting-centered proposal without liability rules adopted by the Parliament will now automatically enter into force in 2021.
If the initiative had passed, it would have required companies to provide proof that they had carried out proper human rights and environmental due diligence by conducting impact assessments of their activities and mitigation strategies to avoid being held liable for any eventual violations. According to the proposal, if companies had failed to carry out adequate due diligence, individual victims and organizations would have been able to hold businesses accountable in Swiss courts and seek reparations and redress for violations under Swiss law. The initiative, therefore, would have been a significant breakthrough in ensuring compliance with international human rights standards and would have been only the second initiative to create an overarching (i.e. along a company’s entire supply chain) mandatory human rights due to diligence framework, following in the footsteps of the 2017 French Loi de Vigilance.
The initiative was met with significant resistance from multinational companies as well as members of the Swiss government and parliament, who claimed that it has reached too far and would put Swiss companies under undue scrutiny for the activities of overseas suppliers, causing a flood of lawsuits and overburdening Swiss courts (!). Some argued that the initiative would prompt Swiss companies to relocate, leading to the loss of jobs and taxable assets in Switzerland. Others pointed to the Covid-19 crisis and the deterioration of the international economic situation. Despite the ultimate defeat of the initiative, it is clear that the Swiss population wants greater accountability for corporate activities abroad.
After the rejection, a watered-down alternative proposal brought to the table by the opposition should automatically enter into force. The counter-proposal creates non-financial reporting duties on environmental matters, employment-related matters, and issues relating to human rights and anti-corruption. As such, companies will be required to publish an annual report, which must remain publically available for 10 years, assessing areas of risk and explaining mitigation strategies. Unfortunately, the measure does not provide for liability (except criminal sanctions for non-compliance with reporting duties or for making false statements), and therefore lacks the necessary provisions to create real change in business conduct. The counter-proposal does, however, introduce issue-specific due diligence measures with respect to child labor and conflict minerals, including in companies that ‘offer goods or services in relation to which there is reasonable suspicion of child labor’ and that ‘circulate or process “conflict minerals” in Switzerland from conflict or high-risk areas.’
If the Responsible Business Initiative had been passed, it would have made major strides in ensuring that Swiss-based companies should comply with human rights obligations and environmental standards also in their activities abroad. Perhaps most importantly, the RBI had the potential to prevent corporate human rights violations by creating legal risks that would have required companies to seriously consider the effects of their activities and, more importantly, take steps to mitigate any potential negative impacts. In comparison, the counter-proposal lacks adequate provisions on accountability, creating little incentive to improve business conduct abroad.
Despite the ultimate failure to adopt the initiative, the immense public support during the campaign – which was one of the most visible and hard-fought campaigns in Switzerland’s recent history – indicates that the central ideas behind the initiative are here to stay. This is even more certain given the highly anticipated mandatory human rights due to diligence framework set to be announced by the EU very soon.
Florian Wettstein, a business ethics professor from the University of St. Gallen, stated: “This should send a clear message to companies that they need to get their act together. It also sends a message to our politicians to really take the issues seriously and be open to stronger measures.”
Corruption can take many forms and is varying in degrees, from the minor use of influence to institutionalized bribery, but it is always at the cost of the public.
The Chair of Transparency International Delia Ferreira Rubio has expressed the position of this respectable think tank with the following words: “Governments must urgently address the corrupting role of big money in political party financing and undue influence it exerts in our political systems.” Normally, governments will only do as much as expected and effectively-being pushed to do. Enquiring into the nature of evil, Edmund Burke reminds us in his famous volume “Reflections on the revolution in France: “The only thing necessary for the triumph of evil is for good men to do nothing.” (Scaldini, 2016, p.2) Disappointed citizens should not limit themselves to complaining privately. They have at their disposal all forms of pressure, from public debate, and calling individual politicians and civil servants to responsibility, to – if necessary – demonstrations, strikes and civil disobedience. The more serious the problem, the stronger must be the citizens’ reaction – and history teaches us, that a lot can be achieved with pressure from below. Of course – for achieving positive change – the pressure, or at least its credible threat, must be constant, not just when the circumstances become unbearable!
The described failure in Switzerland indicates clearly that the battle to eliminate corrupted international business practices of corporations remains a serious challenge. This recent experience in the country leading globally on many qualities illustrates how difficult the battle is to be expected in other environments.
The big question is whose pressure upon governments will be effective, since elections are normally only every four years, while the big business starts pushing their candidates for important positions already before they are elected/appointed (directly and via the media). So there is a competition between pressure from below and the pressure from above. Much of the unethical and illegitimate lobbying conducted by the big business falls into the category of corruption, but as it goes on secretly, it is difficult to fight against it. Organized primarily through parties and NGOs, the electorate should be much more active in-between the elections, in order to make sure that politicians are paying sufficient attention to the public interest. Besides political parties, the NGOs and think tanks also have a responsible role to play in this context, but again many of them depend on corporate funding – in a more or less transparent fashion.
For Transparify - an institution ranking think tanks according to the transparency of their sources of funding – things seem to be gradually improving. During the period of 2013 – 2018, in their 5-grades ranking, the share of top graded think tanks has increased from 48% among 25 assessed organizations, to 67% among 92 assessed organizations.
(Article prepared by the KEN Secretariat prof. dr. Boris Cizelj and prof. dr. Ajda Fošner).
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