Research Topics

Publications

The U4 Blog

Learning & events

About Us

Corruption in the private sector

Corruption in the private sector

Corporate actors are part of the problem and the solution for the quality of public governance and the regulation of the market. Entities from the private sector continue to be involved in corruption schemes; state capture remains an issue in many countries; and the outsourcing of public services to the private sector increases corruption risks. However, some private sector initiatives heighten integrity; solutions from the sector can enhance compliance with anti-corruption requirements related to legal and normative frameworks; and private capital is needed to reach Sustainable Development Goals (SDGs). Donors need to understand how best to engage with the private sector to curb corruption and improve developing country economies.

Collusive practices between private and public sectors

While various definitions of private sector corruption place the emphasis on either the corrupter (private sector) or the corrupted (public sector), the main element is the collusion between public officials and the private sector, which may lead to many illegal and illicit practices.

The most common practice is private agents paying bribes to public officials to take actions in favour of their businesses or themselves. A good example is the bid-rigging that takes place in the procurement process, to get public contracts. Another example is administrative corruption to obtain official documents (eg licences). Also included are economic crimes in which public and private actors are involved for financial gain (money laundering, tax evasion or avoidance, undue influence etc).

Private agents can also try to subvert government policy and decision-making in their favour – a practice referred to as state capture. This is particularly true for multinational companies in a powerful position. They are able to exert undue influence on decision makers to create unfair advantages for them or for a particular industry.

Other activities include: rent-seeking, when private organisations lobby public representatives for protection, subsidies, or preferential policies; and one referred to as ‘revolving doors’, when high-level public agents get private sector jobs (and vice versa) – leading to conflicts of interest and the support for corporate interests instead of the common good.

Corruption among private companies

Private sector corruption is also linked to private-to-private corruption. For example, the Unaoil scandal revealed how private companies bribed Unaoil middlemen to receive lucrative contracts in the oil industry. Kickbacks, bribes, corporate fraud, and collusion among private entities (eg insider trading, cartels) are generally recognised as criminal offences by national laws, as those practices may distort the rules of competition, reduce access to market, and inflate prices. Accordingly, legislation on corruption has to go beyond the definition of corruption as an abuse of public office. International anti-corruption legislation, such as the United Nations Convention Against Corruption (UNCAC), already includes private‑to‑private corruption.

Private involvement in anti-corruption activities can lead to even more corruption, for instance when the oversight of privatised public services is performed by unscrupulous private auditors, leading to sophisticated corruption schemes.

The privatisation process is itself a major source of risk, as it increases the number of contact points between the public and private sectors and therefore the opportunities for both extractive corruption (by the state) and bribery (by the businesses – to gain contracts and advantages). For example, in Russia (but also in many other countries), the privatisation process created rent-extraction opportunities, while reducing the capacity of state institutions to curb corruption in some sectors.

As the World Bank acknowledges, its policies to reform civil service by downsizing it and promoting liberalisation ‘were largely ineffective’. In some places, it may have impacted the quality of public service delivery by worsening conditions for civil servants, hampering motivation and morale, and consequently increasing risks of petty corruption. Yet, this privatisation of state-owned enterprises is even part of the International Monetary Fund’s (IMF) conditions to access loans.

It is worth reiterating that private sector corruption is a danger for political systems (damaging democracy and public trust), public interests (harming public finances or sector opportunities), private interests (distorting competition), and societal issues (generating inequalities). For development practitioners, curbing private sector corruption is directly related to reaching Sustainable Development Goals (SDGs) – in particular SDG 8 (inclusive and sustainable economic growth), SDG 16 (justice and inclusive institutions), and SDG 10 (reducing inequalities).

Why does corruption take place in the private sector?

Drivers for corruption can be similar in the public and private sector, such as for enrichment, status, and power purposes. Yet some differences can also exist and need further explanation.

The rationale for private sector corruption is essentially an economic one, and its typical causes are: profit maximisation; surviving economic hardship; overcoming the competition or gaining a competitive advantage; accessing new markets and ensuring growth; and solving operational problems.

Yet, what appears as a cost-benefit rationale from the private company’s viewpoint (ie the benefits from corruption far outweigh the perceived risks), can be viewed differently by the employees. For example, studies of the Volkswagen and Siemens scandals present different attitudes to corruption between management and staff, highlighting the importance of organisational factors, such as the performance-related pressures placed on employees, deficiencies in compliance systems, and a corporate culture that is prone to corruption.

A private enterprise’s engagement in corruption therefore depends on many internal and external factors – from their operational capabilities and leadership commitment, to peer pressures and external opportunities, such as a change in government and policies. Private companies can adapt to government policies and practices quickly. When corrupt governments are in place, they tend to attract unscrupulous companies, influencing negatively the business environment. When corruption is systemic, it becomes an accepted way of doing business. Even companies suffering corruption schemes from other companies are not willing to expose them, as that would mean revealing their own involvement in corruption.

In 1977, the Foreign Corrupt Practices Act (FCPA) was the first law enacted in the USA to prevent its citizens and private entities from bribing foreign government officials. (This guide explores the FCPA further.) In 1999, the OECD Anti-Bribery Convention was established to reduce political corruption and corporate crime, by implementing standards and measures to deal with bribery in international business transactions carried out by companies based in those countries that are signatories to the Convention. Further guidance and recommendations to assist countries in implementing the Convention were issued in 2009.

The Council of Europe’s 1999 Criminal Law Convention on Corruption had a broader scope than the OECD Anti-bribery Convention, specifically tackling bribery in the private sector and requiring it to be regarded as a criminal offence. Finally, the UNCAC (2003) has the broadest scope and is the most ambitious international legal tool, providing three fundamental pillars for action: preventive measures, criminalisation and law enforcement, and international cooperation.

In line with the UNCAC, more recent national laws include stricter provisions covering both in-country and overseas business activities. For example, with the UK’s 2010 Bribery Act it is now the responsibility of private companies to prove they have adequate management procedures in place to prevent bribery. While convictions under the Bribery Act are not a common occurrence, the Act prompted ‘substantial progress’ in the adoption of anti-corruption measures within UK enterprises.

In France, the 2016 law on transparency, anti-corruption, and economic modernisation (the Sapin II law) requires large companies to have a duty of care to prevent corruption and put in place anti-corruption programmes. Five years later, the law significantly improved anti-corruption standards for French organisations (such as the French Development Agency) and the business environment. However, it covers only those companies (and groups of related companies) which have their headquarters in France. They must also have at least 500 employees and revenues in excess of 100 million euros. Consequently, these conditions limit the law’s reach.

What has been their impact?

Owing to these new legal frameworks, private sector compliance requirements with anti-corruption laws and standards are on the rise globally. Key private sectors, such as financial institutions, have to integrate sustainability and compliance measures. For example, BMCE Bank of Africa received the ISO 37001 anti-bribery certification in 2019. Moreover, the tightening of laws regarding bribery of public officials has also had an indirect impact on the business environment.

Yet, the impact of those legal frameworks is still limited. For example, complex corruption schemes, such as the 2020 Luanda Leaks, reveal how international or transnational companies can circumvent anti-corruption laws via tax havens and enablers (such as the ‘Big Four’ auditing companies, law firms, and corporate service providers). Different factors prevent the enforcement of anti-corruption laws, such as political corruption (political elites wanting to extract or preserve power as a result of corruption), bureaucratic corruption, lack of independence or lack of resources for the judiciary, a culture of impunity, etc.

While improvements in the rule of law, good governance, and the business environment can help to curb corruption, the private sector’s compliance with anti-corruption laws and standards is likely to be slow in countries facing systemic corruption. When designing effective development programmes, country- and sector-specific elements should be considered to ensure better results.

Involving the private sector in development goals

Expectations towards businesses are increasing to face today’s complex social, economic, and environmental issues. For the World Bank, mobilising private sector investment is a necessity for reaching SDGs, for example through blended finance. As a consequence, development aid agencies see more possibilities for co-financing programmes or projects.

Examples of private sector involvement in development projects

In Nigeria, the Foreign, Commonwealth and Development Office (FCDO) supported Adam Smith International with the privatisation of the energy sector and 75% of the FCDO’s programme in Nigeria is delivered through private sector companies. Another example is the support from the US Agency for International Development (USAID) to the private sector for ideological reasons, such as supporting the conversion of state-owned enterprises into private entities in Ukraine or the removal of trade barriers.

The challenges

Private companies are – by definition – profit-driven and therefore their primary purpose is not to care for the common good. While negative corporate duties are formally determined (such as the duty of care in the French anti-corruption law, or the ongoing EU legislation on corporate due diligence and accountability, and the disclosure of financial information for listed companies), positive duties for corporations (the self-regulating business models) are subject to interpretation.

On the one hand, private companies are not subject to the same public scrutiny as public entities, and they might have a legitimate reason to ensure their activities remain confidential. On the other hand, anti-corruption practices and requirements related to corporate social responsibility (CSR) are on the rise, with initiatives such as the UN Global Compact and the Global Reporting Initiatives, and soft laws such as the OECD Guidelines for Multinational Enterprises or the UNCAC (Article 12). Yet, there is no international authority that can enforce positive duties, eg soft laws and standards. Accordingly, the level of responsibility that one should expect from private companies is not clear-cut, and different standards for accountability may apply.

The potential outcomes for public services

This lower level of accountability for the private sector becomes problematic when public interests are at stake. Within sectors operating under financial constraints (eg health, energy, transport), public services tend to externalise part of their activities, through public outsourcing or public–private partnerships. The length of contracts, their high financial stakes, and the complexity of certain partnerships can all generate potential exposure to corruption. The consequences are real: unsafe medicines, the collapse of buildings with deadly consequences, exploitative work conditions, etc. Other adverse effects are more hidden, but are no less harmful, such as inflated costs for public contracts, biased judicial rulings, market monopolisation or the nurturing of nepotism and cronyism.

Paradoxically, with the establishment of new anti-corruption standards, detection capacities increase, fraud cases become more visible, and voices for enforcement become more audible. As corruption becomes more visible, trust in public institutions may erode and trust in the private sector can also decrease. Donors looking to achieve their development goals and involve target populations in their projects should also consider those negative outcomes in their project design.

Developing effective solutions

Solutions to curb corruption and enhance integrity can be found both within the public and private sectors. First of all, new international anti-corruption standards are developed by the International Standard Organisation (ISO) – a non-governmental organisation (NGO) – to support any organisation in its management processes. The ISO 37001 on designing and implementing anti-bribery management systems, provides a framework to incorporate the legal requirements within management processes. Other new standards are ISO 37002 for whistleblowing management systems and ISO 37301 for compliance management systems. Those standards could become mandatory before private companies can win public contracts.

Moreover, many private companies also offer solutions to manage corruption risks within organisations. For example, One Trust and Smart Global Governance provide digital tools to convert legal regulations into management processes.

Small and medium-sized enterprises (SMEs) can also play a strategic role in preventing corruption and ethnic clientelism. In fact, SMEs may have an interest in curbing corruption when some private companies have favourable access to procurement, direct subsidies, and privileged status (ie the selective application of control and sanctions), and anti-monopoly laws are ineffective. A collective-action approach, through formal professional associations, has the best potential to achieve this goal by enforcing social and organisational norms that prohibit corruption.

Going further with collaborative approaches

Through collective actions, multi-stakeholder partnerships (MSPs) are another way to ensure high business standards. By mixing different types of actors (private companies, public entities, and civil society), sharing risks, and combining their resources and competencies, MSPs can collaborate to solve collective action problems. In fact, respect for ethics, trust, and security are essential elements for creating a stable business environment. All stakeholders are likely to have a common interest to define rules of behaviour and sanction free riders. Stakeholders engaged within MSPs can endorse integrity goals by encouraging a government to embrace integrity standards; promoting transparency and business regulation; and/or facilitating the adoption of an integrity norm. Increasingly, development agencies support public–private initiatives, which can take different forms:

  1. Regulatory agencies, as a way to improve standards at the national, sectoral, or international level. For example, in Kenya the Water Services Regulatory Board, supported by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), monitors compliance with policies regulating water services, including corporate governance. FCDO supported the Medicines Transparency Alliance (MeTA) Initiative, involving civil society and the private sector to enhance standards in the medicine supply chain in seven countries.
  2. Coordinated anti-corruption mechanisms, for the detection, prevention, investigation, and sometimes even prosecution of corrupt practices.For instance, in Mexico, GIZ, the Swiss Agency for Development and Cooperation (SDC), and other donors are supporting the National-Anticorruption System (Sistema Nacional Anticorrupción) to coordinate anti-corruption efforts. Even if private sector participation is not formalised within the structure, private companies are involved in policy discussions.
  3. Multi-Partner Fundsto implement and manage specific programmes. Development agencies and the private sector can be involved both as funding partners or implementers, such as within the Global Alliance for Vaccines and Immunization (Gavi).
  4. Sector-specific anti-corruption initiatives, such as the Infrastructure Transparency Initiative (CoST) or the Maritime Anti-Corruption Network (MACN). Their aim is to curb corruption and improve the business environment in a specific sector. For example, in Argentina, the MACN claims a 90% reduction in corruption incidents and the resolution of MACN members’ grievances, as a result of its action. Private companies are directly involved in the governance of those organisations, even if their levels of engagement may vary. Development agencies and public sector leaders could benefit from a structured dialogue on how they jointly could increase integrity and address corruption though MSPs.

Behaviours may not change

Of course, these initiatives do not guarantee that anti-corruption standards will be complied with. Companies may continue their illegal activities despite the implementation of regulation mechanisms and their own involvement in multi-stakeholder initiatives. For instance, Siemens launched its Integrity Initiative to support organisations that counter corruption and fraud through collective action, while themselves being involved in bribery scandals all over the world.

Similarly, compliance mechanisms can be viewed merely as ‘window dressing’ measures or ‘greenwashing’ tools that are used to embellish the image and reputation of private companies. Alstom, while praising its ‘unwavering commitment to integrity’, was prosecuted in 2019 and 2020 for corruption practices taking place in Tunisia(between 2003 and 2006), Indonesia(in 2003), and France(in 2014).

How can donors support the private sector effectively?

Identifying the right partners

When supporting and partnering with the private sector, development agencies should carefully assess reputational and institutional risks. Various corporate characteristics can be examined within due diligence assessments to reduce corruption risks – such as company reputation, quality of risk control systems, use of anti-bribery standards, age, financial information (such as extreme profitability), ownership, and management structure.

The diagnosis of corruption vulnerabilities through speaking with business associations, expert interviews, and conducting surveys can also be a useful approach.Moreover, one concern for donors is the lower threshold for transparency and accountability within private companies. Key factors in establishing a shared evaluation culture are:defining standards with a clear terminology and accurate indicators; and enforcing reporting mechanisms.

Implementing appropriate measures and strategies

One possible way of mitigating the corruption risks that stem from public outsourcing is to involve final beneficiaries during reporting and monitoring activities. Social audits, online social accountability platforms, citizen oversight mechanisms, and whistleblowing systems are all essential tools in reducing corruption and alleviating potential distrust.Of course, those tools may not prevent the more hidden practices arising from the management process and outsourcing (procurement frauds, kickbacks, clientelism, cronyism, etc). Specific tools can be put in place to reduce private sector engagement in grand corruption during the award of public contracts, concessions, and licences.

Donors may also contribute to improving the business environment within specific sectors through the use of collective actions. Engaging with and supporting SMEs’ formal associations, civil society initiatives, or multi-stakeholder partnerships can help to counterbalance large corporate interests and ensure higher integrity standards.

Finally, in a Whole of Government Approach (WoGA), donors have a role to play in enforcing foreign bribery legislation, supporting private sector and developing countries by providing technical assistance or facilitating information flows, or building political will. The use of business toolkits or ISO anti-corruption standards (such as ISO 37001) can help to level up compliance with anti-corruption frameworks within private and public organisations.

    About the author

    Guillaume Nicaise is a Senior Adviser for the U4 Anti-Corruption Resource Centre at the Chr. Michelsen Institute. He leads U4’s work on corruption risk management and the private sector. He previously worked for the German and Belgian development agencies – GIZ and BTC. He also has work experience from the NATO Parliamentary Assembly and NATO itself, as well as the International Crisis Group. Nicaise completed a PhD on the transfer of good governance norms in Rwanda and Burundi from the Ecole des Hautes Etudes en Sciences Sociales, France.

    Disclaimer


    All views in this text are the author(s)’, and may differ from the U4 partner agencies’ policies.

    This work is licenced under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International licence (CC BY-NC-ND 4.0)