Conducting better business bribery risk assessments with corruption typology

February 2021  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2021 Issue

Compliance professionals know that corruption can take many forms. They understand that bribery risk assessment is an individualised process, and thus they must tailor precautions and monitoring to circumstance. But characterising those particularities can be challenging, and discussions about corruption can easily slip into generalities and platitudes. To more effectively assess business bribery risk, compliance officers should take corruption typology into account.

In academic literature, the basic concept of corruption is often reduced to shorthand definitions like “abuse of entrusted power for private gain”, making it harder to build a collective understanding of the phenomenon and to craft appropriate policy interventions. To better define corruption-related concepts, scholars construct typologies: explicitly identifying specific types of corruption and differentiating between the subtleties that shape comparative analysis.

Some of these distinctions are established and familiar, like the difference between ‘petty’ and ‘grand’ corruption. Others roughly correspond to common intuitions, like distinguishing ‘harassment’ versus ‘non-harassment’ bribery to differentiate shakedowns from schemes. Alternatively, a typology can be defined by the nature of corrupt officials’ power, the distribution of authority being exercised or the character of the state resources being exploited. Ultimately, a researcher’s choice of typology will depend on what they are trying to understand – causes, correlations, mechanisms, incentives, motives, consequences – and on the inquiry’s context and scale.

The compliance community has its own techniques for making sense of corruption. We are attentive to how certain risks differ across industries and markets. We are familiar with the distinction between ‘active’ and ‘passive’ bribery, and cognisant of the goods and acts covered by the phrase ‘anything of value’. We note the percentage of enforcement actions involving third-party activity, and we can identify what constitutes a facilitation payment, even if we still consider it a bribe.

These classifications have largely arisen in an ad hoc fashion from a mixture of legal terminology, official guidance and collective political and social knowledge. They supply practitioners with a baseline of shared understanding but fall short in helping us think systemically about the varieties of corruption risk our companies confront. A good typology should not only allow us to identify the specific risks in a given situation, but also yield insight into the broader conditions that foster and exacerbate those risks.

To illustrate this typology, we can examine the dozen enforcement actions concluded in 2020 by US agencies under the Foreign Corrupt Practices Act (FCPA), organising them by the primary structure of the sought-after benefit.

Licensing: Herbalife and Beam Suntory. In Herbalife, at a time when China was grappling with the novel sales practice of direct marketing, the company provided illicit payments, gifts, meals and entertainment to Chinese officials to secure operating licences and to influence government probes into its activities. In Beam Suntory, the company – a distributor of alcoholic beverages – paid bribes to officials in India to obtain local market licences and permission to engage in interstate distribution. Both cases involved distinctive regulatory schemes plausibly intended to minimise the potential harm of exploitative and addictive marketing. The bribery, which was relatively widespread and systemic, can be seen as a form of illicit resistance to local judgments about the limits of societal tolerance.

Prescription: Cardinal Health, Novartis and Alexis Pharmaceuticals. The target officials in these cases were employees of government-run healthcare systems in Europe and Asia. The companies paid bribes to encourage physicians to recommend and prescribe their products. In these cases, the bribery was widespread, often conducted through nominally legitimate means, such as speaker fees or product demonstration dinners. The products themselves were not illicit, but their pharmaceutical potency nevertheless required professional gatekeeping. At the same time, the physicians bearing that duty of care to their patients may not have felt adequately compensated as state employees for the responsibility they held.

Procurement: Airbus. This type of case generally involves bigger-ticket items, with a more centralised point of purchase. In Airbus, bribes were correspondingly fewer but larger. Unlike the licensing and prescription cases, the government did not directly act as guard or gatekeeper for the populace. The profit came straight from government coffers, rather than indirectly from an end consumer. The relevant ethical norms were economic in scope, rather than moral or professional, and the harm was at once concentrated in the treasury and dispersed among the tax base. Higher-profile individual purchases, as in Airbus, require different mechanisms of negotiation and concealment, sometimes through inflation of an already ample profit margin.

Concession: Sargeant Marine, Vitol and Eni/Saipem. Here, the roles of government and company were inverted. The government asserted monopoly privilege over a particular resource for which a company was seeking favourable terms of purchase. Bidding information became a central good that companies sought from officials who may not have had power over the ultimate decision. For resource-rich countries, this sort of corruption can amount to a wholesale kleptocratic diversion of national wealth. The execution of such a scheme may acquire a theatrical dimension, with simulated competition serving to legitimise and consolidate autocratic power.

Finance: Goldman Sachs, J & F Investimentos and World Acceptance Corp. Finally, we have cases in which money itself is the object and vehicle of the scheme, whether it involves a development fund in Indonesia, a national bank in Brazil or governmental loan guarantees in Mexico. In these cases, the target resource became more fully abstracted, intensifying the potential for broader forms of corruption. As a result, the bribe itself can be seen as just one scandal among many, and it may be difficult to identify whose interests are ultimately being served.

In this five-part typology, we draw distinctions based on the source of the benefit (the people in licensing and prescription; the state in procurement and concession) and on which party is seeking to obtain an interest in the relevant vehicle (the company in licensing and concession; the government in prescription and procurement), with the final category (finance) representing a point at which benefits and interests can both become more obscure. We have not included in our typology the range of corrupt activity that does not typically result in high-profile corporate enforcement actions: what might be classified as ‘petty shakedowns’ in other typologies.

Our choice of axes is necessarily somewhat subjective, based more on interpretation than deduction. The larger point is to recognise the value in this sort of analysis, and to encourage a more thorough and reflective discussion of various types of corruption. No single typology will ever be ‘correct’. Their value can only be judged by how well they serve practitioners’ needs: helping them steer clear of prosecution, maintain a level economic playing field and satisfy the ethical demands of their stakeholders.

 

Robert Clark is manager of legal research at TRACE. He can be contacted on +1 (410) 990 0076 or by email: rclark@traceinternational.org.

© Financier Worldwide

BY

Robert Clark

TRACE

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.