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The real long-term cost of bribery

It’s an all-too-common argument touted in defence of bribery and corruption: it’s almost impossible to conduct business successfully and efficiently in certain markets, without paying bribes. Or so they say.

" The message from studies delving into the costs and damaging consequences of corruption is clear – bribery is bad for business."
Guy Boyd, Head of Financial Crime, ANZ

Bribes allegedly are needed to speed up bureaucratic or regulatory burdens, they say, to wine and dine key players in order to win business.

Yet studies looking into the overall impact of corruption on balance sheets don’t support that argument. In fact, bribery and corruption often end up costing organisations far more from a financial and reputational perspective, outweighing any perceived short-term benefits derived from such criminal practices.

It’s a grim fact corruption is still so rife across the globe and is still peddled as a necessary business tool in some markets. The statistics alone are alarming – The World Bank estimates the equivalent of $US1 trillion is offered in bribes every year and 0.5 per cent of a country’s GDP is lost through corruption annually.

In 2013, based on a survey of 114,000 respondents in 107 countries, a Transparency International report found more than one in four people paid a bribe within a 12 month period.  

It is almost becoming commonplace to see multi-national organisations embroiled in corruption scandals splashed all over the front pages of the news. Just this month, a massive leak of confidential documents has for the first time exposed the true extent of corruption within the oil industry, implicating dozens of leading international organisations, bureaucrats and politicians in a complex  international web of malfeasance.

Given the continuing deluge of organisations implicated in bribery and corruption cases, and the eye-watering fines and severe reputational damage levied against those caught out for violating applicable laws, it is difficult to understand why the ethical and business case against such practices continues to be ignored by some organisations.

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SOURCE: Transparency International

EVERYONE ELSE IS DOING IT

Opportunity, a poor culture of compliance, competitive business environments, aggressive sales targets and rationalising corrupt behaviour by claiming “everyone else is doing it, so we must too” go a long way to explain why some organisations struggle to make the right choice.

But are these reasons merely a way to justify questionable business and behaviour which is not only unethical but in some cases illegal?

Most employees generally don’t start out with the intention of acting unethically. Often there is a measure of rationalisation or self-delusion required to act corruptly, such as claiming a law is somehow “out of touch” with the real world.

But perhaps what is not fully understood is the decision to act corruptly is very rarely a one-off or quick-fix. According to Professor Peter J. Henning of Wayne State University “once begun, companies have to continue to pay, often more and more just to stay in place. Corruption is like quicksand – once trapped, the harder you fight, the deeper you sink”.

THE REAL COST

The legal and ethical case against corruption is obvious and widely reported. Cheating is wrong and illegal - yet bribery and corruption remain rampant.

“When corruption allows reckless companies to disregard the law, the consequences range from water shortages in Spain, exploitative work conditions in China or illegal logging in Indonesia to unsafe medicines in Nigeria and poorly constructed buildings in Turkey that collapse with deadly consequences,” according to Transparency International.

But if that is not enough to deter some organisations, crunching the numbers and looking at the financial effect makes for a compelling argument.

Harvard Bribery study found “corruption does boost local sales, but those are cancelled out by the costs associated with bribery, as indicated by return on equity”.Of course, if an organisation gets caught committing bribery and corruption, the short-sighted gains could be potentially dwarfed by legal and compliance costs.  

“Weaker corruption controls and enforcement allow…firms to generate higher sales growth in high-corruption markets…yet bribes are costly,” the report says.

“The low returns on incremental sales in high corruption markets for firms [which commit bribery] imply the costs are not fully recovered through higher prices on corrupt contracts or through scale economies from increased sales.”

Then there are the other hidden costs. Widespread bribery and corruption within an organisation sets a permissive tone which inevitably invites more and greater demands.

“Companies that pay bribes actually end up spending more time negotiating with bureaucrats since the hopes of a payoff gives officials an incentive to haggle over regulations,” Nin-Hai Tseng says in Fortune.

“Corruption ultimately breeds more corruption, as bribes give bureaucrats more incentive to raise red tape and regulatory hurdles, which in turn opens companies up to pay even more.”

A NO-BRAINER

If it were true that it’s almost impossible to conduct business successfully and efficiently in certain markets without paying bribes, a business paying them should be more efficient and generate higher financial returns. The data shows the opposite.

Two researchers from the World Bank studied the assumption bribes reduce “red tape” and ease regulatory burden and found “contrary to the ‘efficient grease’ theory, we find firms which pay more bribes are also likely to spend more, not less, management time with bureaucrats negotiating regulations, and face higher, not lower, cost of capital”.

Accountability and transparency are now consecrated in law, expected of leaders across all ranks and in all communities and demanded of within the world of business.

Tackling corruption is now firmly on the global agenda and will only continue to be the focus for enforcement agencies worldwide, meaning the business case for fighting corruption has never been stronger.

The message from studies delving into the costs and damaging consequences of corruption is clear – bribery is bad for business.

 “Corruption raises costs and introduces uncertainties, reputational risks and vulnerability to extortion,” Transparency International says. “It makes access to capital more expensive, depresses company valuations and corrodes staff morale.”

“In the broader market environment, corruption undermines fair competition, leads to lost business opportunities and nurtures corrupt bureaucracies. Corruption in and by business hollows out the very basis on which its own existence and success depends: the functioning and sound governance of markets...”

For my organisation, ANZ, the evidence is incontrovertible: a strong stance against bribery and corruption and a firm commitment to combat it across the entire organisation is not only ethical, logical, safer and smarter - it also makes better business sense. 

Guy Boyd is Head of Financial Crime at ANZ 

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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