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September 2006
 By Jonathan Levine, Center Senior Associate
Q: Most foreign businesses in Africa, including in my country of Liberia, seem to go with the flow of corruption, either by directly participating with corrupt government leaders or indirectly supporting their habits. I understand that to get favorable business dealings, companies often have to abide by what government officials demand. But in their efforts to generate business and maintain security of their staffs, massive social and environmental degradation results from their bad business practices. What can western companies do to practice good governance and take care of the environment in the face of pressure from corrupt officials? Isn't it time that they use their hiring and tax influences to force corrupt leaders to change their behaviors?
-R.S., Monrovia, Liberia
A: After 14 years of civil war, financed partly through payments extracted from business by former warlord president Charles Taylor, your country has surely endured some of the worst fallout from corruption. The destruction of Liberia’s public infrastructure, social institutions, the economy and environment has been tragic. (Taylor is now awaiting trial on charges of war crimes and crimes against humanity.) Yet similar pressures exist in virtually every country to some degree, whether it be collusion, fraud, petty bribes to facilitate business transactions or large-scale extortion in major projects. And don’t blame only public officials. Unscrupulous companies abuse the system every day by greasing the palms of officials to unblock customs delays, to secure permits and other common functions.
The problem for individual companies trying to act ethically is the “first-mover” disadvantage they face when less-principled competitors have no compulsion to behave. No one wants to be first. The good news is that momentum has been building in recent years to strengthen collective action, through anticorruption codes, international conventions and self-policing by certain industries.
Collective Action
Since the late 1970s the U.S. Foreign Corrupt Practices Act, with stiff penalties for making illicit payments to win foreign contracts, has been the gold standard in anticorruption law. (It also often put American companies at a disadvantage against unrestricted foreign competitors.) But in 1997 the Anti-Bribery Convention of the Organization for Economic Cooperation and Development set a landmark international standard that increasingly compels others to match the U.S.’s no-bribery policy. Similar conventions in Europe, Africa and Latin America, and in late 2005 the United Nations Convention Against Corruption, have since created a more consistent regulatory framework globally. Numerous codes and principles to help businesses strengthen their internal ethical practices have since followed -- from the World Bank, the World Economic Forum, International Chamber of Commerce, Transparency International (TI), the Global Reporting Initiative. The list goes on.
One of the more promising schemes comes from a collaboration of the oil, gas and mining industries, which perhaps more than any others have felt the pressure mounting on their reputations from past dealings with host governments. The three-year-old Extractive Industries Transparency Initiative has shown fair progress so far in uniting companies, producing states and NGOs to shine a light on the flow of taxes and royalties to states and how they’re used. The approach is bearing fruit in places like Azerbaijan, which recently began disclosing and auditing payments from oil and gas companies according to EITI standards. “Collaboration is essential to stemming corruption,” the CSR manager of one EITI-supporting company tells me. “For any company to go toe-to-toe alone against a government is suicidal.”
Collective efforts are also underway in the project-finance sector, with its Equator Principles, and other industries. And TI has advanced an innovation in public contracting known as “Integrity Pacts,” or sanction-bound agreements between government procurers and bidding companies that neither will engage in bribery or collusion. The pacts have been used so far in 14 countries and produced significant savings in public contract pricing, from telecommunications in Colombia to water-sewer systems in Pakistan.
Zero-Tolerance Enforcement
Such collective actions can only succeed if corporations implement strong internal measures as well. First and foremost is the adoption and serious enforcement of zero-tolerance policies for both employees and intermediaries. This “just say no” approach to corruption not only avoids the corrosive costs of bribery. It also wins big points for the reputation of companies like GE and Total Group that have implemented stiff enforcement protocols. “What counts are actions on the ground,” says an oil industry veteran. “I’ve seen employees let go for giving a small contract to a family member. That sends important signals.”
Just as businesses invest in their own infrastructures, they should also consider investing in the infrastructure of developing countries – in the judicial systems, civil organizations, anti-corruption regimes and other enabling frameworks that protect the market for future growth. Most countries have anti-corruption laws on the books but many lack the means to enforce them. Thus, in Colombia, BP helped broker a deal with the U.S. Agency for International Development and the central government to establish a court system in a remote region where it was drilling for oil, resulting in significant declines in local crime. (A downside, of course, is that business will become viewed as a substitute for the state, or that such efforts will be seen as distorting the governance process by bending it toward the interests of business.)
Sometimes such investments can have tangible business benefits as well. In the late 1990s Merck & Co. began investing $3 million in an educational initiative to promote ethical workplace standards in government and businesses in the United Arab Emirates. As one result a few years later, the UAE ministry of health overturned a contract to a local manufacturer who had pirated a patented Merck drug, and awarded it to Merck instead. “The reversal set a strong precedent,” Nidal Fakhoury, Merck’s local manager, told me at the time. “No one wants to be seen as breaking the rules anymore.”
Playing Hardball
Backed up by the growing clout of legal conventions, commitments to good governance and social investments like Merck’s and BP’s, companies increasingly are in a position to play hardball with extortionists. “It’s getting easier to say: ‘If you want our investment in your country, this is how we want to play the game,’” says Luc Zandvliet, who has analyzed the interaction of numerous corporations and local societies as director of the Corporate Engagement Project at the Collaborative for Development Action. Here are some of the tactics he has observed companies use in the face of strong-arm public authorities:
• A few years ago Placer Dome insisted on setting up a fully transparent tax credit scheme in Papua New Guinea whereby it pays only about 30% of its total tax bill to the national government. The rest is channeled directly to local projects in four provinces where the company operates gold mines. Local payments are restricted to infrastructure projects, rather than operating budgets, so that local communities are sure to benefit from the mines, and authorities are not tempted to divert the revenue.
• Avaricious officials often carry out corrupt behavior through family and clansmen, whom they pressure companies to hire. So in countries such as Nigeria and Mauritania, one western company has made clear that it hires only on the basis of merit and ethnic diversity. To assure transparency in the process, it requires job applicants to take exams and appoints representatives from different ethnic communities to verify the results. Likewise, Newmont Mining set up a job lottery in Ghana for its non-skilled labor pool, setting aside only 10% for patronage positions for the local chiefs – thus easing some of their pressure to “deliver” jobs to constituents while eliminating the climate of corruption created by a concentration of the chiefs’ inside men.
• Total used its investment clout a couple of years ago by insisting it would withhold oil production – and thus any revenue flow to the government – until Khartoum signed and affected a sustainable peace accord in its north-south conflict. Though an agreement was signed in early 2005, operations are still pending a lasting peace. Total’s resolve distances it from appearances of supporting a corrupt and despotic government and avoids its being used as a pawn in the government’s ethnic agenda. Likewise, Talisman negotiated with the Sudanese to fully disclose the flow of revenues from the company to the government. This was seen as a first step in allowing international donors to demand greater accountability of how the government uses its revenues and could possibly lead to making bilateral assistance conditional on good governance.
• Companies can also train and work with civil society groups to make them more assertive in supporting budget transparency and accountability by government authorities. BP has used the tactic in Colombia, as did others in post-apartheid South Africa.
It’s easy to focus your angst against corrupt politicians and individual officials. But regardless of different political economic environments around the world, most successes in fighting business-related corruption share a common thread: private-sector advocacy to reform inefficient institutions that breed it. Do you have examples of successful anti-corruption efforts by business? Send them to us, and we’ll share them in future columns.
 Have a question about managing your international CSR activities? Ask Jonathan Levine, a Center Senior Associate and an independent researcher and advisor to companies on their international CSR initiatives. Send him an email at jon@jonathanlevine.com. Please include your full name and phone number in case he needs more information; only your initials and city will be printed. Because of the volume of mail, he won’t be able to respond to all questions personally.
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