Magazine for Senior Financial Executives: The added cost of corruption

The added cost of corruption – Risk Management

Don Durfee

Increased political instability around the globe has made doing business overseas a thorny proposition. Yet it’s another threat that could be more destructive to international commerce: bribery.

A recent survey conducted by Control Risks Group, an international business risk consultancy, found that 40 percent of companies think they have lost business because a competitor paid a bribe. A similar percentage chose not to make an attractive investment because of concerns about corruption.

“Corruption is like a tax,” says John Bray, director of analysis in Control Risks’s Tokyo office. “If good companies want to do business in places where there are high rates of corruption, they need to spend more management time to solve the problems.” Indeed, the survey found that a third of executives believe corruption raises the cost of transactions by more than 10 percent.

U.S. executives, who are required by the Foreign Corrupt Practices Act (FCPA) to maintain clean business practices, aren’t above the fray. In fact, there is a perception that the FCPA has done little to curb under-the-table payments–70 percent of respondents think U.S. companies use middlemen to skirt the regulation, although it’s forbidden by the FCPA.

What can companies do about the problem? According to Fred Miller, a partner at PricewaterhouseCoopers’s Investigations and Forensic Services practice, they should conduct random reviews of foreign operations. “Don’t tell them you’re coming,” he says. The review team should include someone who understands the local language and customs, he adds. After all, bribery can be hard to detect; payments may be disguised as marketing expenses, consulting fees, or commissions.

Companies might also learn from the oil industry. Royal Dutch/Shell Group, for example, publishes an annual report on its performance in the area of “social responsibility,” which includes corruption. The report, which is certified by an outside auditor, is refreshingly candid. It even lists the number of employees fired during the previous year for engaging in corruption (three in 2001).

THE KICKBACK PREMIUM

How much does corruption add to the cost of international projects?

0-5% 22.0

6-10 22.4

11-25 7.2%

26-50 13.2

Over 50 15.6

Don’t know 19.6

SOURCE: CONTROL RISKS GROUP

Note: Table made from pie chart

COPYRIGHT 2003 CFO Publishing Corp.

COPYRIGHT 2003 Gale Group