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Cheque and credit card fraud;
Cyber crime;
Identity theft;
Chapter 7 “ Economic crime, bribery and corruption 131

Insurance fraud;
Money laundering;
Procurement fraud;
Product counterfeiting; and
Revenue and VAT fraud.
(RSM Robson Rhodes LLP Report on Economic Crime, 18.10.2004)
What is corruption?
* The abuse of entrusted power for private or public gain. It can hurt
everyone whose life, livelihood or happiness depends on the integrity
of people in positions of authority.

Economic crime and corruption can have some devastating impacts on

Corporate bribes to the local and national government official and inspectors
cut severely into cash flows;
Corrupt leadership can systematically siphon off a nation™s riches;
Competing corporations can secure contracts through illegal kickbacks to
corrupt government officials, at the expense of honest companies, thus buy-
ing an unfair advantage in a competitive market;
Internally, fraud and corruption can divert organisational funds and assets
into the hands of criminals; and
Unsound or faulty buildings, built to lower safety standards because a bribe
passed under the table in the construction process, can collapse in an earth-
quake or hurricane, causing life threatening loss or damage.

Internationally crime and corruption can have very adverse effects upon the
market environment as they can:

Distort national and international trade;
Undermine the rule of law and democratic values and can compound polit-
ical exclusion;
Jeopardise the ethics and sound governance of the public and private sectors;
Threaten the domestic and international security and the sustainability of
natural resources;
Have dire global consequences, such as trapping millions in poverty and mis-
ery and raising social, economic and political unrest;
Be one of the most serious obstacles to reducing poverty. Corruption denies
poor people the basic means of survival, forcing them to spend more of their
income on bribes; and
Deny human rights where corruption is rife, because a fair trial comes with a
hefty price tag where courts are corrupted.
Part B “ Overview of the Economic Aspects of Business Risks

The international framework
The primary document asserting the desired level of behaviour by organisa-
tions with respect to national laws is the UN Norms on the Responsibilities of
Transnational Corporations (the UN ˜Norms™ “ http://www.unhchr.ch/). The
main rights with regards to an organisation™s sustainable risk management sys-
tem with regards to economic crime are outlined below.
These are that organisations and business enterprises should have respect
for national laws and process, including the avoidance of bribery and corrup-
tion measures and shall:
˜recognise and respect applicable norms of international law, national
laws and regulations, as well as administrative practices, the rule of law,
the public interest, development objectives, social, economic and cultural
policies including transparency, accountability and prohibition of corrup-
tion, and authority of the countries in which the enterprises operate™ (UN
Norms 10);
˜not offer, promise, give, accept, condone, knowingly benefit from, or demand
a bribe or other improper advantage, nor shall they be solicited or expected
to give a bribe or other improper advantage to any Government, public offi-
cial, candidate for elective post, any member of the armed forces or security
forces, or any other individual or organisation™ (UN Norms 11); and
˜respect economic, social and cultural rights as well as civil and political
rights and contribute to their realisation, in particular the rights to develop-
ment, adequate food and drinking water, the highest attainable standard of
physical and mental health, adequate housing, privacy, education, freedom
of thought, conscience, and religion and freedom of opinion and expression,
and shall refrain from actions which obstruct or impede the realisation of
those rights™ (UN Norms 12).
This is quite a lot and almost puts business organisations on a parity with
governmental bodies in terms of the actions recommended (UN Norms 12).

An introduction to the business risks
As has been seen in highly reported scandals such as Andersen, Boeing, Enron,
Halliburton, Tyco, Mars and WorldCom, there has been a deluge of news items
to fill up the newspapers over several years.
This is a global problem which often means that the effect of individual
countries to reduce these types of activities normally means their ˜competitive-
ness™ suffers and their resident businesses lose contracts. The 1999 Organisation
for Economic Cooperation and Development (OECD) Convention against bribe-
paying has sought to remedy this market imperfection and introduce a more
˜level™ market environment.
The OECD Convention was a major step forward in addressing the supply
side of transnational commercial bribery, thus reducing the competitive pres-
sures that lead to bribery. It has made it possible to prosecute business people
Chapter 7 “ Economic crime, bribery and corruption 133

accused of corruption in their home countries as well as in the jurisdiction
where the offence took place. This convention “ and other international initia-
tives (see below) “ does have a significant impact in this area of business risk.
However, the problem is that the pace of change remains uneven: the ˜rules™
often change at different speeds in different countries and sectors. The chal-
lenge is for directors of international companies or organisations to find ways
of implementing effective internal anti-corruption programmes while still win-
ning business in an imperfect world. For instance, in some countries the party
and the government are virtually synonymous and some individual govern-
ments are unwilling to undertake prosecutions “ often because of the difficulty
and expense of gathering evidence abroad.
Drivers for change have, however, become stronger since the OECD
Convention came into force on 15 February 1999, largely through media inter-
est and NGO activist pressure, such as Transparency International (TI) (see fur-
ther below) working with the United Nations in a global compact.

Perennial problem?
The first recorded anti-bribery law was enacted by an Egyptian pharaoh in
the 14th century BC; he imposed the death penalty on judges who took
bribes during legal dispute handling.

Other global initiatives also exist. The oil sector has been an initial target for
activists to try and standardise some sort of code of behaviour between all par-
ticipants in tenders for contracts. As indicated, meanwhile, large investors like
George Soros have made this a central element of their activist investor cam-
paigns. Moreover there is a corruption ranking system in use to view which
countries are perceived to have the least corruption. The Transparency
International (TI) index focuses on the public sector, and how far there is an
abuse of office is for private benefit. Two-thirds of the countries assessed are
seen to have serious levels of corruption. The greatest declines in corruption
seem to have occurred in the already least corrupt state, in that it may be a self-
perpetuating social trend (http://www.transparency.org/ “ see also further dis-
cussion below). There are concerns that such league tables could unfairly
hinder investment in the lower ranked countries. Once again these factors need
to be integrated into a Sustainable ERM system that incorporates such external
risk factors. Indeed, with reference to numerous senior executives having to
resign at German blue chip companies, Peter von Blomberg of Transparency
International, Germany, says:

Each corruption case that comes to light leads to more companies realising they have to
take preventative measures against corruption. (Financial Times, 28 July 2005 ˜Germany
ponders extent of corruption as heads roll™)
Part B “ Overview of the Economic Aspects of Business Risks

National governments are starting to act in the wake of scandals which
reflect poorly on their management of the business environment. Meanwhile
international bodies like the European Commission (EC) have strengthened
their pursuit of cartel members. These can escape prosecution in exchange for
information on their agreements with other parties.
It should be noted that the reported view of the UK Confederation of
Business Industry (CBI) is that the UK™s adherence to anti-bribery and corruption
measures would ˜endanger a number of valuable contracts™ (Financial Times, 14
January 2005). However, these types of considerations did not prevent the Anti-
Terrorism, Crime and Security Act 2001 from being a powerful piece of legisla-
tion with a number of provisions to address the problem of bribery and
corruption abroad; it also enables criminal prosecutions to be brought within
the UK against a company and its officers.

Surveys and case studies
SERM has found that there seems to be a gulf between organisations™ overall
processes in this respect and the feelings of the staff that are involved with the
systems. Numerous surveys show most employees in Europe would be willing
to report evidence of fraud in their workplaces, yet fewer than one in 10 feels
that they could go to the police with evidence.
The risks have increased as executives are losing their jobs and being sent
to jail more regularly:

Three former Ahold executives received suspended sentences and fines of
$860 000 for their part in a 2003 accountancy scandal that almost bankrupted
the Dutch food retailer;
Boeing sacked its finance director, Mike Sears, stating that he violated com-
pany policy by discussing a potential job offer with a US government official
while working on matters affecting the company. Another senior Boeing
employee faced up to five years in jail and a fine of up to $250 000;
Ex-Tyco chief Dennis Kozlowski faced up to 25 years in jail after the New
York jury convicted him of grand larceny and securities fraud. Mark Swartz,
the ex-CFO, was also found guilty;
Four Mars UK staff were jailed for up to six and a half years for their
respective parts in an elaborate scam involving bribes and fraudulent
invoices that is estimated to have cost Mars millions (Financial Times, 6 May
UK oil major BP sacked 252 staff in an anti-corruption drive in 2004, being
50% higher than the previous year;
Total, the French oil company, detained several of their staff for investigation
in relation to suspected bribes paid to foreign government officials (Financial
Times, 4 October 2004);
Martha Stewart served five months for obstruction of justice and false state-
ments relating to her selling of ImClone stock; and
Chapter 7 “ Economic crime, bribery and corruption 135

The conviction of WorldCom™s Bernie Ebbers demonstrated that age is not a
barrier to proceedings.

Key corporate examples:

BHP, the Anglo-Australian mining giant, is also alleged to be implicated in
the Iraq oil for food scandal and whether an A$8m wheat shipment may have
contravened the UN sanctions in Iraq;
Weir, one of Britain™s largest engineering groups, admitted to making pay-
ments to Saddam Hussein™s regime in Iraq that amounted to $8m to supply
industrial parts under the UN™s oil for food programme;
A UK water company tried to silence their whistleblowing finance manager
by sending him a letter through a law firm stating that the company no longer
considered him protected by the Employment Act, Section 43, known as the
˜whistleblower™s charter™;
Germany™s two largest utilities, Eon and RWE, were embroiled in an investi-
gation by state prosecutors into whether they bribed municipal politicians
with opulent journeys abroad (Financial Times, 24 January 2006);
The UK™s Financial Services Authority (FSA) fined the Capita Group “ the
company that implemented the London traffic congestion charge and collects
television licence fees “ £300 000 for anti-fraud control failure;
The Nigerian government attacked Halliburton and its partners for their
alleged failure to cooperate with a hearing into an alleged $170m bribery case
(Financial Times, 22 October 2004);
The US Securities and Exchange Commission (SEC) is investigating five com-
panies for allegedly entering into joint ventures with companies partly or
wholly owned by members of the oil rich regime of Equatorial Guinea.
Companies cited include ExxonMobil and ChevronTexaco (Financial Times,
31 August 2004); and
The South Korean firm Hyundai Motors has pledged US$1bn of its own
money to South Korean charities to stem the public relations damage over an
alleged bribery scandal (Financial Times, 20 April 2006).

Reported country examples:

Transparency International™s (TI) Russian office says that corruption is grow-
ing there. Russia™s deputy prosecutor general says that corrupt bureaucrats
cost Russia £125bn a year (The Guardian, 8 November 2006);
Bribery in Russia is up tenfold to $316bn in four years according to
Indem, the independent think-tank; their methodology involved interview-
ing 1000 businesses and 3000 individuals at random and extrapolating the
figures; and
US Republican lobbyist Jack Abramoff admitted fraud and bribe plots, and
the Democratic Party hopes to use this admission to their advantage by
exploiting the perception of the existence of ˜a culture of corruption™
(Financial Times, 4 January 2006).
Part B “ Overview of the Economic Aspects of Business Risks


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