How Do Leading Multinationals Successfully Reduce Risk in Emerging Markets?

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Foreign direct investment in emerging markets -- like this Volskwagen plant in Brazil -- can be lucrative, but also carries risks. (Photo: Volkswagen AG)

Foreign direct investment in emerging markets — like this Volskwagen plant in Brazil — can be lucrative, but also carries risks. (Photo: Volkswagen AG)

Emerging market countries are absorbing more investment than ever before, much of it from large multinationals. More than $886 billion in foreign direct investment (FDI) flowed into developing and transition countries in 2013, an all-time high. And businesses will continue expanding operations into emerging economies as the annual consumption in these markets is expected reach $30 trillion. At the same time, however, the losses companies are incurring in these markets continue to grow. Due to complex regulatory frameworks, multinationals often face multiple risks in these countries, including bribery and fraud. How can companies operate ethically to avoid risks and make the most profit?

FTI Consulting recently surveyed 150 risk and compliance executives from North American and European-based multinational companies with operations in emerging economies in their latest report, What Companies Do Right (and Wrong) in Emerging Markets. According to the report, many multinationals have experienced significant losses in emerging economies due to three reasons: problems with regulation, bribery and fraud, and reputational issues. Regulatory issues are the most frequent cases of profit loss. Bribery and fraud issues are the most expensive. And reputational issues often make a bad situation worse. The most damaging and costly cases happen when two or more of these risks converge.

The companies that suffer the greatest losses are those that under-invest in or insufficiently focus on their projects and subsidiaries in these markets. On the other hand, the firms that flourish in these economies protect themselves against risks by taking the following steps. Read more…

Corruption Q&A with Sarah Chayes

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Sarah Chayes photo

Photo by Kaveh Sardari

Sarah Chayes’ recent book, Thieves of State: Why Corruption Threatens Global Security, makes a powerful case connecting severe corruption to a variety of security crises currently plaguing the world, from the expansion of Boko Haram in Nigeria and ISIS in Iraq to the Arab Spring Revolutions. At a time when some anti-corruption thought leaders are arguing that freedom from corruption should be a basic human right and others are advocating for the creation of an international anti-corruption court, Chayes’ book adds another dimension, by using corruption as a lens through which to understand the root causes of many of today’s security challenges. Chayes is a senior associate in the Democracy and Rule of Law and South Asia Programs at the Carnegie Endowment for International Peace. She lived for a decade in Afghanistan, reporting the fall of the Taliban for NPR, staying on as an entrepreneur who founded a manufacturing cooperative in the former Taliban stronghold, and working as a special adviser to the chairman of the United States Joint Chiefs of Staff.

Chayes spoke to CIPE’s Value Chain Lead Frank Brown about her work studying corruption and security.

  • How would you describe the impact of your book in anti-corruption circles worldwide? Are you surprised by the reaction in any way?

The response within anti-corruption circles could not be more positive. In both style and content, “Thieves” is an unusual – and I hope gripping – take on the topic, and so has perhaps been a refreshing addition to the debate for many who have worked in this field for some time.

More broadly, the book appeared at a – sadly – propitious moment, as the crises in Ukraine and Iraq were forcing increased focus on the corruption issue, and in particular in a security context. So I have gotten more outreach from government and the private sector than ever before, and from unexpected quarters.

However, I continue to be startled that elements of the argument that seem so obvious to me are still facing stiff headwinds inside government. In particular, the link between corruption and violent extremism. While the U.S. government has been emphasizing corruption with respect to, say, Ukraine, as soon as there is a whiff of terrorism in the air the instinct is to support and facilitate the corrupt government — whose practices are often fueling the terrorists’ recruiting drives. Examples include close collaborations with the governments of Algeria, Bahrain, Cameroon, Chad, Egypt, Ethiopia, and so on.

Another obvious issue that seems hard for many government – and non-profit – practitioners to metabolize is that humanitarian and development assistance represents a significant revenue stream for corrupt elites. The Nigerians have an expression for the connected implementing partners that capture such a significant portion of development assistance: GONGOs, for “government-organized non-government organizations.” Read more…

Stealing the Future

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Photo: Wikimedia Commons

Photo: Wikimedia Commons

Years ago, a woman paid a bribe to Polish officials to obtain an exit visa for her and her six-year-old son to travel to the United States. Her son was Tom Malinowski, and he would grow up to become the U.S. Assistant Secretary of State for Democracy, Human Rights, and Labor. Speaking recently about this simple act of corruption at American University Washington College of Law, Malinowski wondered, “Is corruption really so bad?” After all, it brought him to the United States and secured his future. Devil’s advocates argue that corruption greases the wheels of commerce and facilitates political deals. Its dividends can be used to build great art and architecture. Besides, self-interest is part of human nature. Malinowski ultimately rejects those arguments and concludes that corruption really is “so bad.” And it is so bad because of its connection to human rights. Read more…

The Characteristics of Corrupt Corporate Cultures

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bsr-ataylor-250x344Alison Taylor, the Director of Advisory Services for BSR (a global non-profit organization focused on sustainability) contributes the following article, which was originally posted on the Global Anticorruption Blog.

Despite all the investment in corporate anti-bribery compliance programs, supported by a lucrative consulting industry dominated by investigation companies and accounting and law firms, violations of anti-bribery laws, and firms’ own compliance policies, remains widespread. Why? The usual explanations focus on the external environment (“That’s just the way they do business over there”) or on “rogue employees,” but tend to neglect issues of “organizational culture”—how groups and teams behave when they might have a corruption problem. Yet organizational culture, structures, and incentives have been powerful factors in causing professionals to indulge in systemic corrupt practices.

But what, exactly, are the cultural drivers of corruption? What do a “culture of compliance” and its converse, a “culture of corruption,” actually look like? To find out I conducted in-depth, qualitative interviews with 23 experts on anti-corruption and corporate ethics. My questions were simple: What is the culture like in a corrupt organization? Can we generalize about leadership, decision-making, incentives, values, and behavior in corrupt organizations? Can we use these findings to understand the characteristics of an ethical culture? Read more…

Do We Need an International Court to Prosecute Grand Corruption?

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Does the world need an International Criminal Court for prosecuting grand corruption?

Does the world need an International Criminal Court for prosecuting grand corruption?

The Organization for Economic Cooperation and Development (OECD) estimates in a 2013 report that child mortality rates in countries with high levels of corruption are about one third higher than in countries with low corruption, and infant mortality rates are almost twice as high. When officials use their positions for private gain – such as awarding concessions for the extraction of natural resources based on cronyism or accepting multi-million dollar bribes to maintain slack border regulations – entire nations sink into desolation. Instead of a transparent and safe environment for all citizens, public services deteriorate and everyday people are left open to exploitation. By stealing their nations’ resources and using their authority to gain personal wealth, corrupt governments are not only committing fraud – they are reaping suffering, hunger, disease, and even death among the citizens of their country.

Do such egregious human rights abuses require international action? When corruption is carried out by heads of state and their close associates, it is often endemic to every public institution in a country, leaving citizens with no recourse. Dictators, Presidents-for-Life, Kings, and even democratically elected leaders are free to operate with impunity.

One of the principal debates raging within the anti-corruption community centers around the idea of an international court to prosecute ‘grand corruption,’ defined as state leaders and politicians misusing their authority to sustain their power, status, and wealth. These are the Frederick Chilubas, Robert Mugabes, and Muamar Qaddafis of the world – heads of state and their colleagues in the upper echelons of government or business (often both) who amass vast fortunes via their control over national resources, government contracts, and state revenues. Such an anti-corruption court would provide an international mechanism for bringing these otherwise immune individuals to justice – a global watchdog to defend the citizen victims of these enormous and unconscionable crimes.

The argument for such a court has prominent proponents and detractors alike, all anti-corruption experts who agree on the need but not the means to tackle the grotesque amount of graft emanating from some of the highest offices in the world. Most notably, U.S. District Judge Mark Wolf and Executive Director of Not in My Country Roey Rosenblith, who support the initiative, find themselves at odds with Harvard Law’s Matthew Stephenson and Northwestern’s Karen Alter and Juliet Sorensen. Judge Wolf, while not the first to propose such a court, has crystallized the idea into a working proposal that envisions an entirely new and independent International Anti-Corruption Court (IACC) modeled after the International Criminal Court (ICC). Among other mechanisms to ensure the initiative’s success, Wolf recommends making World Bank loans as well as membership of international organizations like the OECD and WTO open only to signatories of this Court.

Critics argue that the ineffectiveness of the ICC makes it a poor model for a new international court. Linking participation in the court to membership in key international institutions could pose an even bigger problem, potentially leading major international players like the United States, India, Russia, China, and Brazil to oppose the court, while many corrupt leaders would readily forego World Bank financing and other benefits to protect themselves and their personal corruption networks. Indeed, it is hard to imagine dictators who have spent decades corruptly accumulating wealth and power to join to an international court that could potentially take it all away — regardless of the level of pressure to do so or the consequences of refusing.

Read more…

Compliance Q&A with Anwar Hashmi

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June Anwar Hashmi 1Anwar Hashmi is a Senior Consultant within Global Ethics & Compliance at Integrity Leadership Partners, LLC  in the Washington DC Metro Area. He has over 14 years of experience in designing, developing, and implementing Global Ethics Programs at Tata Steel, a global Fortune 500 company and Tata Group’s flagship company. Hashmi has been associated with the Business Ethics Program of the company since the Tata Group developed its first Code of Ethics in 1998. While at Tata Steel, Hashmi was actively engaged in the institutionalization of the Global Ethics Program through training and sensitization as well as development and implementation of an ethics system and policies. He also initiated a process of benchmarking the Ethics Program among the world’s top multinational companies. Following the UK Bribery Act’s enactment in 2010, Hashmi launched an initiative to raise awareness amongst Tata Group Companies. The combination of these efforts contributed to Tata Steel being named as one of the World’s 100 Most Ethical Companies by the Ethisphere Institute.

CIPE’s Stephanie Bandyk discusses with Hashmi the factors that led to Tata Steel formalizing the firm’s unwritten code of ethics. Hashmi also discusses what motivated other emerging market companies to follow Tata’s lead.

  • Corporate compliance and ethics programs are still not universally common around the world. In your experience, what are some of the factors behind companies in emerging and frontier markets recognizing the need for such programs and then taking concrete steps to implement them?

I can speak about the Tata Group. Codes of Ethics and Corporate Ethics Programs were not well-known subjects amongst Indian corporations. Tata Group had a long legacy of promoting ethical business conduct, which was like an unwritten code for the Group and religiously followed. Prior to 1990, the Indian economy was closed and there was not much competition, with companies operating in a protected environment. Price was determined by government agencies, so selling your product was not an issue. Then, with globalization and the opening of the Indian economy, which led to unprecedented growth of the Group both domestically and internationally, there was a felt need for codifying the values and business conduct to create value-synergy amongst the varied Group companies operating in different regions. A written document could give guidelines on the mode of Business and Personal conduct for the Group companies and employees.  The Western experience on this was used as a best practice and the Group developed its first Code of Ethics in 1998. We benchmarked the Code with the top Global Corporations Code. Since I was involved in the designing and development of the Code, I still remember how we gathered codes of ethics of U.S. companies like Martin Marietta and many others to use as a standard. With the development of the Code, the Group felt the need for an implementation program that could be applied uniformly across the Group. The implementation program was developed and became known as Management of Business Ethics (MBE).

  • What’s motivated other companies to develop similar programs?

Tata Group was the first to develop a formal Code of Conduct. With the opening of the Indian economy, other Indian companies also started looking for business opportunities globally, especially within Western markets, and searched for association or joint partnerships with the U.S. and other developed countries. Such ethics programs are a requirement of doing business in Western or similar markets – companies need to have articulated values and a defined code of ethics. This led to other Indian companies developing a Code of Conduct and a structure to implement it. In fact, Tata’s experience was used as a benchmark by most of the Indian companies. I was personally called upon by several companies, in both the public and private sectors and other agencies, to help them develop a code of ethics. Read more…

Benchmarking Anti-Corruption and Bribery: A Look at Kroll and Compliance Week’s 2015 Report

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bribery-third-parties
The good news according to the 2015 Anti-Bribery and Corruption (ABC) Benchmarking Report is that many risks have plateaued since the report’s launch in 2011. The bad news is that the survey answers still paint a discouraging picture of compliance officers’ struggles to implement a global strategy for anti-bribery compliance and to tame vendor and third party risks.

Produced by Kroll and Compliance Week, the ABC Report provides an annual, comprehensive view of the types of ABC risks compliance officers face, the resources available for mitigating risks, and how these resources can be best utilized in effective compliance programs. Nearly 250 representatives worldwide from industries including financial services, industrial manufacturing, business services, and insurance responded to the report’s survey, which was broken into four categories: risks, third parties, due diligence efforts, and program effectiveness.

If risks seemingly have plateaued, have compliance efforts also? Though roughly half of all compliance officers surveyed expect their bribery and corruption risks to increase this year (within 1 percentage point of last year’s report), the companies have only minimally stepped up their efforts to enhance compliance in third-party relationships. Forty-eight percent reportedly never train their third parties on anti-bribery and corruption issues, a concerning statistic as third parties arguably bring the gravest risk and heaviest burden for compliance programs. Read more…

Combatting the Cascading Costs of Corruption

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usaid-anti-corruption

Corruption imposes significant economic and social costs on development across all sectors, undercutting both democratic governance and economic prosperity. To solve this immense global problem, the development community and the private sector will need to work together to target the sources of corruption

To this end, USAID’s Governance and Rule of Law Program released a guide to anti-corruption programming entitled “Practitioner’s Guide to Anticorruption Programming” earlier this year.

“Sometimes I see that the private sector and NGOs are at loggerheads and don’t see each other’s perspective or how they can work together,” said Kenneth Barden, a key contributor to the guide. This realization, in part, inspired the creation of the Guide in order to, “let everyone know what we’ve learned and build on those experiences – and to think abstractly and to harmonize, get a more focused approach,” said Barden. Read more…

The Importance of Effective Policy Writing for Compliance

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policy-writing

Last week I was reviewing a company’s supply chain code of conduct which was sent to thousands of distributors around the globe. It was not impressive. Cluttered with unnecessary and complex language, it featured lengthy paragraphs and heavy use of the passive voice. It was written in English but distributed in China and Russia — ignorance of international audience was also a big problem. Further, one paragraph described “the organization’s only mission” and then another paragraph began “One of the organization’s missions,” showing that the organization itself is in need of a consistent policy.

Why it is imperative to have a clearly-written policy? Policy engagement starts with (effective) policy writing, which is the foundation for an effective code of conduct. A policy basically defines the general business guidelines by which the organization operates. Policy, as laid out in a clearly written code of conduct, establishes the compliance and ethics practices on an enterprise-wide level, which can be further distilled into procedures that define ongoing process of work.

Emphasizing effective policy, Carole Switzer, president of the Open Compliance and Ethics Group, raises the question, “When we are trying to engage employees without overloading them with policies, how can we make sure that each employee gets what they need and no more?” She further adds, “In the past, a big challenge has been keeping policies fresh and making sure people aren’t accessing and using old data. How does automation in a policy system address these issues?” Read more…

Compliance Q&A with Nancy Boswell

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Boswell photoNancy Boswell is Director of the American University Washington College of Law’s US and International Anti-Corruption Law Program, a certificate program for practitioners worldwide. CIPE’s Frank Brown discusses Boswell’s academic work, along with general global anti-corruption trends in light of her past leadership of Transparency International USA and her current advisory role at various U.S. and international ethics-centered organizations.

  • The Washington College of Law at American University’s summer program focused on anti-corruption law issues seems to be the only one of its kind in the United States. Can you describe how you conceived of it, how it has developed, and how, if at all, the way it has evolved over these years has surprised you?

The WCL Anti-Corruption Law Program was designed to meet today’s demand for trained public, private, and non-profit sector professionals to carry out integrity and compliance functions.

Public officials are struggling to fulfill the demands of their citizens for more accountable government.  The private sector is confronting a highly competitive global market and, at the same time, a heightened risk of prosecution for illicit dealings.  Development agencies are under pressure to make sure their assistance reaches those in need and is not diverted for corrupt purposes.  Non-profits are pressed to protect humanitarian assistance from corrupt demands under crisis conditions.

The challenge for all these stakeholders is to put into practice what we have learned about fighting corruption.  We have secured global consensus on laws, standards, and practices to address corruption, notably the UNCAC and regional anti-corruption agreements and a host of voluntary private sector integrity and compliance standards.

Today’s challenge is to secure comprehensive, effective implementation and enforcement of these new laws, standards, and practices.  To secure progress on a global scale will take technical capacity and political will. Read more…