Ed. Note- today we continue with Part II of our three part series by out colleague, Mary Shaddock Jones. 

Yesterday we discussed Occupational Fraud and how, according to the ACFE, survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gloss World Product, the ACFE estimates that this translates into a potential projected annual fraud loss of more than $3.5 trillion dollars.

One can never lose focus on what I consider the key question as they enter or play within the international arena:  What are the socio-economic and cultural risk factors that make companies and individuals conducting business in a particular location more vulnerable to possible corruption schemes?   We cannot adequately address corruption unless we address both the “supply side” and the “demand side”.

Considering the “Demand Side” of the Equation:

I recently ran across an article that was published in the 2010 World Policy Journal[i] entitled “THE BIG QUESTION: How Can Nations Break the Cycle of Crime and Corruption”? The World Policy Journal asked a panel of experts to weigh in on the challenges of crime and corruption.  Two of the quotes contained in the article are as follows:

“Corruption thrives where civil liberties, free press, transparency, and contestable politics are absent. A functioning rule of law matters for controlling both crime and corruption, but again differences emerge: an independent judiciary is crucial for combating political corruption; an effective police is important for fighting petty corruption as well as common crime. There are also differences between the determinants of common crime and organized crime, since the latter does relate to corruption.”  Daniel Kaufmann (at the time of the article was a senior fellow in the Global Economy and Development Program at the Brookings Institute)

“Corruption should not be approached as a moral problem, as too often happens, but as a symptom of serious political and economic problems that need correcting. Petty corruption, such as low-ranking civil servants demanding payment for services they should provide for free, is a problem that requires restructuring the civil service, reducing the number of public employees within a government, and providing those who remain with decent wages. Attempts to curb petty corruption are unlikely to have an impact when extracting payments from the public is the only way a government employee can feed his family. Grand corruption, such as large payments to high-ranking officials to secure lucrative public contracts, requires political solutions. If there is no renewal of the government and the political class, grand corruption inevitably becomes a problem. Frequent turnover of government officials make it more difficult for corrupt networks to consolidate power. Democracy is the best anti-corruption measure…Donor countries worried about corruption should focus on two tasks: putting in place good control mechanisms over the funds they provide; and promoting fundamental political, economic, and administrative reform.” Marina Ottaway (at the time of the article was director of the Middle East Program at the Carnegie Endowment for International Peace)

In March of 2012, Compliance Week 2012 had an online program entitled “Targeting the Demand for Facilitating Payment- Compliance Week (Online).  The Article discussed the efforts undertaken by a consortium of compliance executives primarily from the energy industry is taking aim at one of the most vexing headaches businesses face today: facilitation payments.  While “facilitating payments” are permitted under the U.S. Foreign Corrupt Practices Act, they are not allowed under the U.K. Bribery Act or the local laws of most foreign countries.  In addition, the line between a true “facilitating payment” and a “bribe” is indeed a fine one.  With this in mind, the group formed the new Committee to Address Facilitating Payments (“CAFP”).  According to the article, the committee’s strategy is to convince governments to crack down on requests for facilitation payments by their officials, thus reducing the demand. It wants governments to review the documentation that certain transactions require, how the required fees are paid (cash or wire transfer, for example), and whether the processes can be automated to reduce risk. CAFP is also working on a country-by-country basis to convince governments to provide more training to officials that facilitation payments are improper and to make sure that those officials are fairly compensated.

Multiple Kudos need to go out to this group of executives.   The fight against corruption must target both the “demand side” as well as the ‘supply side”.   Tomorrow we will discuss the “Supply Side”.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.