The Handbook of Business and Corruption

In its most basic usage, “corruption” means a change from functional or good to dysfunctional or bad. This definition is far too broad to be of use to scholars or policymakers, who need a more precise, shared definition so that they can communicate meaningfully with one another. Scholars and policymakers have developed scores of definitions, which this chapter briefly explains. Within this galaxy of definitions, scholars and policymakers have tended to favor one definition, which this chapter calls the “general definition.” The general definition describes organizational corruption as: the abuse or misuse of power or trust for self-interested purposes rather than the purposes for which power or trust was given. This chapter discusses and illustrates the general definition. The chapter concludes by pointing out that the general definition is only one definition. In many places, the public is deeply concerned with phenomena such as undue influence, which should also be taken into consideration as a form of corruption even though it falls outside of the general definition.

In this chapter, four different theorizations of corruption are presented. The first concerns the principal–agent understanding of corruption. The second explains how a person is socialized into corruption. The third builds on philosophy and posits that corruption is degeneration from an ideal, presenting a multifaceted view of different goods and their respective corruptions. The fourth is inspired by psychoanalysis and explains why corruption is often externalized and seen as a feature of other people, companies, sectors, and countries. The chapter claims that to understand corruption fully without running into simplistic analyses, one always needs to reflexively consider various perspectives, of which these four are important examples.

Facilitation payments (petty corruption) are small payments to an officer or employee, public or private, who is responsible for a nondiscretionary service, in order to facilitate, accelerate, or cheapen a procedure, for example, issuing a passport or connecting a house to a power distribution network. They are widespread in some countries, and are often considered irrelevant, but they have very large negative impacts in generating a culture of corruption, affecting the functioning of public offices or private companies and on costs for citizens. This chapter explains what facilitation payments are, why they are an ethical problem for people who pay and receive them, for companies and for society, and the positioning of the fight against those payments within the overall strategy against corruption.

The side effects of disguised bribes are hidden by their apparent good consequences (as pseudo-gifts). The aim of the chapter is to unveil to what extent pseudo-gifts (as disguised bribes) could distort the cultural, social, and communicational functions of gift-giving practices. We will firstly describe how disguised bribes could be analyzed from a Sartrean perspective, given that Sartre’s notion of bad faith could help to better understand the three basic kinds of substantive loss which follow from disguised bribes: (a) the loss of commonalities (the cultural function of gift-giving as distorted by disguised bribes: Malinowski’s notion of culture): we will analyze the phenomenon of guanxi; (b) the loss of social bonds (the social function of gift-giving as distorted by disguised bribes: Durkheim’s notion of culture); (c) the loss of communicability, and the arising of an empty truth (the communicational function of gift-giving as distorted by disguised bribes: Jaspers’ notion of truth claims). Gift-giving practices are culturally rooted. This is the first level of analysis (surface). Seizing the social and moral function of gift-giving practices unveils the second level of analysis (beneath-the-surface). Describing the communicational function of gift-giving practices opens the door to the third level of analysis (exchanges of truth claims). Bribery is the distortion of those basic functions of gift-giving practices. We are then facing an empty truth (the communicational function of culture is distorted).

Any concept of disguised bribes must be empirically tested. The way the cultural, social and communication functions of gift-giving practices are distorted could vary from one culture to another. Future research could check how such distortions arise in given societal cultures. It could then distinguish the side effects of disguised bribes, either from a cultural viewpoint, or from social perspective, or even from a communicational pattern of reference. Unveiling the multiple ways of distorting gift-giving practices could help decision-makers to better understand the frontiers between bribery and gift-giving. Emphasizing the various functions of gift-giving practices, from a philosophical and sociological perspective, could allow business decision-makers to raise their ethical awareness.

The purpose of this chapter is to highlight the cultural values which underpin the practice and acceptance of nepotism and cronyism in societies and organizations worldwide. We argue that there are advantages inherent in harnessing the resources of the social networks involved in nepotism and cronyism, but there are also major problems arising from the inequality and unfairness of these practices. A theoretical consideration of cultural values combined with illustrative cases is used to discuss nepotism and cronyism in different cultures. We suggest that nepotism and cronyism exist in all cultures but perception and discussion of these phenomena as well as the perceived gravity of their effects can vary according to the cultural values of egalitarianism and universalism, together with the economic development of the societies in which they occur.

This chapter considers viable and nonviable methods for corruption and ethics reform. Among the different types of methods considered are: vision and values based methods; win-win incentive and ethics networking methods; power-based top-down compliance and bottom-up whistle-blowing methods; alternative institution building methods; and, social movement methods. The chapter analyzes how the different types of methods can be more and less viable depending upon the specific multilevel situational factors related to micro individual, meso organizational, and macro institutional level, political-economic, and cultural obstacles to corruption and ethics reform.

The study of corruption was slow to take root in the social sciences, but has produced a notably more complete and precise understanding of why corruption persists around the world. This chapter begins with an exploration of some of the most robust findings of the corruption literature in business-related fields. Central to these early studies is the establishment of the role of institutions in shaping behavior within specific geographies and the lasting impact of activity within those geographies on firms that subsequently invest outside of them. The chapter also depicts the inherent challenges of the development context of many of the largest known incidents of government corruption with an exploration of the TSKJ (Technip, Snamprogetti, KBR, Japan Gas) case in Nigeria. The chapter concludes with a summary of the most informative findings of this area of research and a call for the most productive future areas of research.

This chapter discusses the special case of extractive industries in relation to susceptibility to corruption, especially in states with weak institutional and governance structures. The systemic nature of this corruption is shown in a vicious cycle of extractive resource dependency and corruption which reinforce each other. The chapter then concentrates on the supply side of corruption, and the role of the private sector with domestic and foreign natural resources companies feeding into systemic corruption. Corruption is underpinned by a high demand, high prices for extractive resources scenario, and mitigated by a low demand, low prices scenario. Transparency oriented, anticorruption measures may not be effective in their own right, but a low demand, low prices scenario could provide an opening for such measures to take root, with accompanying benefits to the citizens of resource rich states and their environment. This suggests taking a contingency approach to dealing with corruption.

In 2006 the German-based electronics company Siemens faced widespread corruption and bribery allegations. Investigations of the German state attorney’s office disclosed an amount of more than 2.3 billion of suspicious payments to foreign governments (Schubert & Miller, 2008). It turned out that Siemens had bribed governmental officials in order to secure contracts and to obtain favorable conditions over more than three decades (Schmidt, 2009). Though Siemens had a clearly stated anticorruption policy this did not prevent the company from getting involved in one of the largest corporate scandals in German business history.

A deeper analysis of the scandal reveals at least four fundamental shortcomings which enabled the corrupt practices on all organizational levels. First, most of the managers saw no alternatives to secure their foreign business, especially in countries where bribery payment has been a widespread practice. Second, the managers had created misguided bonds of loyalty believing that personal engagement in the corruption scheme was part of their dedication to the company. Third, due to corporate routines and commonly accepted practices, most managers lacked a clear sense of reality seeing corruption as part of the regular business at Siemens. Fourth, poor governance structures and a lack of clear regulations for doing business in a corrupt environment made it easier for managers to bypass official regulations.

The principal issue that will be considered in this chapter is how the banking sector facilitates the crimes of money laundering and tax evasion. This will entail asking a series of related questions. Does the assistance of the banking sector in financial crime involve a small number of wayward employees at the periphery of banking? Or are multinational financial institutions willing participants in the systemic evasion of global antifinancial crime standards? In exploring these questions, the theory and practice of money laundering will be explored by focusing on the three stages of the money laundering cycle. The global anti-money laundering standards that apply to the banking sector, and the role of bank secrecy in promoting tax evasion, will be examined through a series of case studies. It will be argued that there is strong empirical evidence that the banking sector is a systemic offender facilitating financial crimes, despite the enactment of international and national antifinancial crime standards and criminal prosecutions of financial institutions.

In 2012, the New York Department of Financial Services threatened to revoke Standard Chartered Bank’s U.S. license for alleged money laundering violations involving Iran. The bank’s settlement with US regulators and law enforcement cost the bank approximately $1.099 billion. In 2013, as a signal that no bank was too big to jail, the Holding Individuals Accountable and Deterring Money Laundering Act was introduced into the U.S. Congress. We focus on a clinical examination of the Standard Chartered money laundering case and examine the role of the US regulators and law enforcement in the settlement.

It is well-reported that financial and investment sectors of the economy have grown in recent years, but also that problems of corruption, both institutional and venal, are present. Within the sector, financial auditors and investment consultants have been entrusted to work with and for those for whom financial sector stability and adequate financial returns are crucial. However, these two professions have too often served as handmaidens of corruption. This chapter reviews the history of financial auditing and investment consulting and outlines areas in which corruption manifests. It argues for an end to corruption and it asserts that the two professions could and should be the core of an uncorrupted robust system of financial practice and regulation. Such an arrangement could safeguard a world in which investment business practices are sustainable, honest, and truly productive.

Informal payments in health care exist in many countries around the world. However, the prevalence of informal payments varies between countries. A distinction between illegal or unethical informal payments like bribes and corruption, and legal and ethical forms of informal payment like giving gifts is not always easy to make. Illegal and unethical practices include, for example, buying medical certificates, bid rigging during procurements, or selecting service-providers for a hospital based on personal connections. A conceptual global definition of informal payments in health care is not feasible because informality depends on local regulations, values, and traditions. In this chapter, we provide an up-to-date understanding of informal payments in health care (including corruption, fraud etc.) by distinguishing micro, meso, and macro levels of informal payments. We argue that informal payments that occur at these levels cannot be unified under one umbrella of corruption because the various forms of informal payments in health care differ in nature, scope, and damaging effects.

Using the pharmaceutical sector as a microcosm of the health sector, we highlight the most prevalent structural and policy issues that make this sector susceptible to corruption and ways in which these vulnerabilities can be addressed. We conducted a literature review of publications from 2004 to 2015 that included books, peer-reviewed literature, as well as gray literature such as working papers, reports published by international organizations and donor agencies, and newspaper articles discussing this topic. We found that vulnerabilities to corruption in the pharmaceutical sector occur due to a lack of good governance, accountability, transparency, and proper oversight in each of the decision points of the pharmaceutical supply chain. What works best to limit corruption is context specific and linked to the complexity of the sector. At a global level, tackling corruption involves hard and soft international laws and the creation of international standards and guidelines for national governments and the pharmaceutical industry. At a national level, including civil society in decision-making and monitoring is also often cited as a positive mechanism against corruption. Anticorruption measures tend to be specific to the particular “site” of the pharmaceutical system and include improving institutional checks and balances like stronger and better implemented regulations and better oversight and protection for “whistle blowers,” financial incentives to refrain from engaging in corrupt behavior, and increasing the use of technology in processes to minimize human discretion. This chapter was adapted from a discussion piece published by Transparency International UK entitled Corruption in the Pharmaceutical Sector: Diagnosing the Challenges.

In Bangladesh, the fertilizer market is the main source of corruption in the agriculture sector. Market imperfection allows the input dealers to extract extra benefit from the market through selling fertilizer at higher than government declared price, and the benefit is positively correlated with market restriction. Bribery or unauthorized payment in the fertilizer market negatively affects farm profit. Empirical evidence shows that restricted fertilizer markets encourage corruption, as bribe-paying farmers can acquire their required fertilizer and thus operate at a higher efficiency level than their counterparts who do not pay bribes. Alternatively, in markets where sufficient supply is available and farmers face liquidity constraints, corruption further restricts farmers to collecting their optimal input bundle and ultimately reduces efficiency. Nepotism and negligence of duty are the two most common form of corruption in the extension service. Along with identifying several key causes of corruption, this article suggests some interventions to combat corruption.

In this chapter, the nature and extent of corruption in the construction industry is considered from a worldwide perspective, but particularly in the context of research conducted in South Africa. The definition of corruption is expanded to include conflict of interest and unethical conduct. Corruption in the construction industry is found to be universal and pervasive, occurring in all areas, at all stages, at all levels, and in all forms. A simple triangular model of corruption is replaced by a more complex four-dimensional risk-based model. The challenge for the construction industry, in combating corruption, will essentially require multilateral action in all four dimensions of the enhanced model: eliminating and reducing opportunities where possible; relieving the pressures to commit corrupt acts; rebutting the rationales and arguments used to excuse corruption; and substantially improving and innovating more forensic methods of detection. While the decision to engage in corruption is risk-based, particularly in terms of the capacity to evade detection; in essence corruption is a cultural and moral issue for society.

Given its social importance, Sport (especially Football), which has experienced an astounding transformation into a global industry with significant economic impact, has been a vehicle for the transmission of cultural and universal values. Its structural complexity (players, transfer agents, clubs and its owners, right holders of different contracts) creates a lot of moving parts that can easily hide illicit activity, especially because this structure incorporates the international market. The movement of large amounts of money, the difficulty in accounting for all transactions, and ironically, the clubs’ own financial needs increase this sector’s vulnerability to organized crime. For many years, this sector has had a relatively free hand in its efforts to make criminal assets legal. This is made possible by some ineffectiveness of current national and international laws and enforcement bodies, which have not kept pace with the changing situation. It is already known that sport historically has been used as a tool for enrichment of a specific group of companies, an issue deserving of public concern. This chapter argues for a sensitive situation involving the actors of the public and private sectors, notably its regulations, in order to curb corruption and money laundering through sport. The purpose is to address these matters by identifying the risks of misconduct within sport organizations, and proposing measures that could prevent, hamper, and punish any attempts to thwart these organizations’ main goal: promoting sport as a way for cultural improvement and teaching people the values of tolerance and civilized coexistence.

Using a general model of corruption that explains and accounts for corruption across professions and institutions, this chapter will examine how certain practices in the media, especially in areas where journalism, advertising and public relations regularly intersect and converge, can be construed as instances of corruption. It will be argued that such corruption, as in the case of cash-for-comment scandals, advertorials, infomercials, and infotainment, as well as public relations media releases disseminated misleadingly as journalistic opinion, is regular, ubiquitous, and systematic.

As other worldwide sourcing industries the retail sector is also prone to various forms of corruption. In particular large retail chains doing business in developing countries are often faced with corrupt bureaucracy and struggle with dubious administrative processes. On the other hand the purchasing divisions of large retailers decide upon million dollar deals with their suppliers which may tempt manufacturers to pay bribes for winning the deal. While such forms of corruption may be found also for other businesses there are other practices which may be recognized as corruption which are typical in the retail sector. One of the most controversial discussions concerns the practice of so-called slotting fees which are charged to manufacturers as a contribution to the handling costs of the retailer. Since such fees are negotiated in secrecy and not broken down by categories of expenditure they are often seen as a bribery-like payment demanded for getting contracts or staying in business. In the following chapter we will analyze these practices from an economic perspective. We will provide some empirical findings on how such payments are assessed in practice and conclude with some ethical considerations concerning the practice and the effects of slotting fees.