Private corruption

  • Given the growing number of corporate scandals, the role of the private sector is indispensable in fighting corruption
- Narayan Manandhar
Private corruption

Jun 19, 2014-

Essentially, corruption inflicts two levels of damage to the private sector. At the individual firm level, it raises the cost of doing business and introduces uncertainty, reputational risks and vulnerability to extortion. Corruption also makes access to capital markets more expensive, depresses company valuations and corrodes staff morale. At the environment level, corruption undermines fair competition, leads to lost business opportunities and nurtures corrupt bureaucracies. Definitely, corruption is bad for business; but can we make business bad for corruption?

There are two explanations related to corruption and the private sector. The first is related to supply and demand. If politicians and public officials constitute the demand side of corrupt transactions then the private sector represents the supply side. An effective approach to anti-corruption is to have both demand and supply side interventions. Unfortunately, policymakers and civil society members fail to note the role of the private sector in fighting corruption. If everybody refuses to pay bribes, government officials cannot demand kickbacks and, consequently, there cannot be corrupt transactions.

The second explanation includes identifying whether the private sector is a victim or a perpetrator of corruption. The supply side argument assumes the private sector to be a perpetrator. However, it can also be a victim. One needs to differentiate between victim and perpetrator, for the private sector will cooperate and engage in anti-corruption activities only when they are victims. Therefore, the private sector can be a problem as well as a solution.

On a global level

Irrespective of these arguments, private sector corruption has become a big agenda for debate and discussion at the global level. Corruption has become so pervasive that it is no longer confined to a single nation, territory or society; it has become a global problem. National governments are becoming weaker in dealing with corruption problems emanating from the operation of multinational and transnational companies. To address this global problem, we need global instruments. The introduction of the UN Convention against Corruption (UNCAC) is designed to address this issue. Controlling private sector corruption is one of UNCAC’s tasks. The role of the private sector is mentioned in all fours aspects of an anti-corruption drive—prevention, criminalisation and law enforcement, asset recovery and international cooperation.

The Government of Nepal ratified UNCAC in February 2011. To meet UNCAC obligations, the government, in July 2012, drafted an anti-corruption strategy and action plans. Among 15 objectives in the Strategic Plan Document, Objective Number 8 is related to controlling private sector corruption. This is in line with UNCAC obligations.

Realising the immense role of the private sector in combating corruption, in June 2004, UN Global Compact—the world’s largest corporate sustainability initiative—also included a 10th principle—an anti-corruption principle—which reads: “Businesses should work against corruption in all its forms, including extortion and bribery.”

Slow awakening

Though, at the beginning, private sector business communities were not very receptive to the 10th principle, there is now a growing realisation that the private sector can and should work to combat corruption, given the growing number of corporate scandals. In the corporate world, even the failure to install adequate anti-corruption mechanisms can become a crime. There are proactive innovations taking place in the corporate world. Microsoft now extends its anti-corruption policy to its supply chain management, implying that it refuses to deal with any company that have not installed anti-corruption measures.

The awakening of the private sector for anti-corruption in Nepal came after the revelation of massive bank defaults by private sector firms in early 2000. The Commission for the Investigation of Abuse of Authority (CIAA) is reportedly flooded with fraud complaints from the banking and cooperative sectors. Now, corporate fraud runs not in the millions but in the billions. Nepal’s public procurement and construction sector, where the private sector is one party to the transaction, is synonymous with deceit, bribery and corruption. Tender bidding for public contracts is more a problem of security than a matter of financial transactions.

In spite of so much need and obligation to fight private sector corruption, there is total confusion resulting from the CIAA’s constitutional mandate. The Interim Constitution mandates the CIAA to investigate and prosecute corruption crimes only in the public sector. Even the judiciary and Army are excluded from its purview. The law is silent over the mandate of the CIAA and there is confusion over whether the CIAA can or cannot take anti-corruption action against the private sector. Take the case of illicit enrichment, which is applicable only to

public officials.

The second confusion rests with defining private sector corruption. There can be private to private sector corruption as well. A procurement officer in Company A may be working in collusion with a sales agent from Company B. How would you treat sales commission paid to the sales agent—as an incentive or a bribe? How would you handle issues like insider trading, misreporting of company performance, conflict of interest, syndicate and cartelling? Definitely, there are sector specific regulatory laws but these laws were never formulated from the perspective of anti-corruption. The laws are not only inadequate and ambiguous, in many cases but often do not exist at all. Take the provisions related to management disciplinary actions in Nepal’s labour law. As per Article 51, various acts like the embezzlement of enterprise transactions, bribery and leaking of company secrecy are culpable acts. However, the maximum penalty a management can impose is to fire the employee. This is quiet lenient compared to penalty provisions in the public sector.

Not just bribery

Definitely, extortion or chandaa atanka, is a nagging issue faced by the private sector in Nepal. In the wake of the last Constituent Assembly elections, National Business Initiative (NBI)—a private sector business NGO specialising in corporate social responsibility—drafted a Business Code of Conduct wherein corruption control is listed as part of ethical business. The code forbids businesspeople from giving “any kind of donation, presents or services/facilities to any political person or party with an intention of gain in the future.” Similarly, it promises “not to bribe, give gifts, donations, presents directly or indirectly for earning business and financial advantage.” The business community has also pledged to make transparent any legitimate donations and contributions made to philanthropic organisations. It is interesting to note of a paradoxical situation. While the NBI was busy drafting an ethical business code, the CPN-Maoist party was reported busy categorising Nepal’s business community into various grades like A, B, C and D so that their cadres can raise donations in conformity with their business grade.

The issue of private sector corruption has to be looked at not just from the narrow perspective of business bribery. One needs to go beyond and see the problem from a broader perspective, like conflict of interest and ‘revolving door’ policy. In order to restrict a revolving door policy, the government is proposing a ban on the employment of retired senior civil servants in policymaking positions in the private sector for at least three years. Without the commitment and cooperation of the private sector, this policy cannot be implemented.

Manandhar is a freelance consultant with an interest in corruption and governance issues

Published: 20-06-2014 09:05

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