Corruption is a global threat that costs over $1 trillion per year. It harms economic growth by more than the amount of bribes paid. Corruption arises when public officials use their position for private gain, such as by accepting bribes in exchange for government contracts, licenses, or tax breaks. Factors that contribute to corruption include opportunities for economic rent, wide discretionary powers of officials, and lack of accountability. Systemic corruption is very difficult to overcome and can devastate an economy.

1. Business Financial
Crime: Bribery and
Corruption

2. 2
Corruption – A Global Threat
Cost of corruption exceeds by
far the damage caused by
any other single crime
 World Bank – More than 1 trillion
US$ is paid in bribes a year
 Asian Development Bank – Cost of
corruption = up to 17% of GDP
 The harm exceeds the proceeds –
US$ 1 bribes = US$ 1.7 damage

3. 3
Corruption
 The use of public office for private gain, or
in other words, use of official position, rank
or status by an office bearer for his own
personal benefit.

4. 4
Corruption Levels
 Large bribes have been reported to have been paid to get
foreign contracts or to get privileged access to markets or to
particular benefits such as tax incentives.
 Le Monde of March 17, 1995, reported that the bribes paid
abroad by French companies in 1994 had been estimated at
FF10 billion (£1 billion) in a confidential government report.
 World Business of March 4, 1996, reported that the bribes
paid abroad by German companies had been estimated to
exceed US$3 billion a year.
 These were not the only countries in which companies had
paid bribes to foreign officials. Some experts have estimated
that as much as 15 percent of the total money spent for
weapons acquisition may be “commissions” that fill
somebody’s pockets.

5. 5
Corruption Levels
 Among the economic changes that have taken place in recent
years, privatization has been most closely linked with
corruption.
 These problems have been observed and reported in all
regions of the world, but the abuses appear to have been
particularly significant in the transition economies.
 In these countries some individuals have become enormously
rich because of these abuses.
 For example the Russian experience. In the privatization of
large monopolies, such as Gazprom, many close to the
corridors of power received highly valued shares at very low
prices.
 And the “loans-for-share” scheme made some banks
shareholders of enterprises by extending loans to the firms.
 These developments have made many Russian citizens
highly skeptical about the virtues of a market economy.

6. 6
Bribery
Business corruption focuses on bribery:
 An offer or receipt of any gift, loan, fee,
reward or other advantage to or from any
person as an inducement to do something
which is dishonest, illegal or a breach of
trust in the conduct of the enterprise’s
business.

7. 7
(2013)

8. 8
(2013)

9. 9
(2013)

10. 10
Corruption
 Corruption can arise under a variety of circumstances.
1. Government contracts: bribes can influence who gets
the contract, the terms of the contract, as well as terms
of subcontracts when the project is implemented.
2. Government benefits: bribes can influence the
allocation of monetary benefits such as credit subsidies
and favoured prices and exchange rates where price
controls and multiple exchange rates exist.
3. Government revenue: bribes can be used to reduce the
amount of taxes, fees, dues, custom duties, and
electricity and other public utility charges collected from
business firms and private individuals

11. 11
Corruption
4. Time savings and regulatory avoidance: bribes
can speed up the granting of permission,
licenses and permits to carry out activities that
are perfectly legal. This is the so-called “grease
money”
5. Influencing outcomes of legal and regulatory
processes: bribes can be used to provide
incentives to regulatory authorities to refrain
from taking action, and to look the other way

12. 12
Economic Rent
 The concept of economic rent (or monopoly profit)
occupies a central place in the subject of corruption.
 Economic rent arises when a person has something
unique or special in his possession.
 This something special can be a luxury condominium in
a posh neighbourhood, a plot of land in the central
business district of the city, a natural resource like an oil
well
 A person who owns such a special asset can charge a
more than normal price for its use and earn economic
rent or monopoly profit.

13. 13
Corruption Equation
C = R + D – A
 In the above equation, C stands for corruption, R for economic rent,
D for discretionary powers, and A for accountability.
 The equation states that the more opportunities for economic rent
(R) exist in a country, the larger will be the corruption.
 Similarly, the greater the discretionary powers (D) granted to
administrators, the greater will be the corruption. However, the more
administrators are held accountable (A) for their actions, the less will
be the corruption, and hence a minus sign in front of A.
Kiltgaard, R. (1998) International cooperation co-operation against
corruption, IMF/World Bank, Finance and Development, 35(1): 3.

14. 14
Corruption Equation
 The equation tells us that a fertile ground for
growth of a thoroughly corrupt system will
emerge in a country if it satisfies the following
three conditions:
1. It has a large number of laws, rules,
regulations, and administrative orders to restrict
business and economic activities and thereby
creates huge opportunities for generating
economic rent, and especially if these
restrictive measures are complex and opaque
and applied in a selective, secretive,
inconsistent and non-transparent way.

15. 15
Corruption Equation
2. Administrators are granted large discretionary
powers with respect to interpreting rules, are
given a lot of freedom to decide on how rules
are to be applied, to whom and in what manner
they are to be applied, are vested with powers
to amend, alter, and rescind the rules, and
even to supplement the rules by invoking new
restrictive administrative measures and
procedures.
3. There are no effective mechanisms and
institutional arrangements in the country to hold
administrators accountable for their actions.

16. 16
Incidence
 Incidence of corruption varies among societies, and it
can be rare, widespread or systemic.
 When it is rare, it is relatively easy to detect, isolate and
punish and to prevent the disease from becoming
widespread.
 When corruption becomes widespread, it is more difficult
to control and to deal with.
 The worst scenario is when it becomes systemic. When
systemic corruption takes hold of a country, the
institutions, rules and peoples’ behaviour and attitudes
become adapted to the corrupt way of doing things, and
corruption becomes a way of life.
 Systemic corruption is very difficult to overcome and it
can have a devastating effect on the economy.

17. 17
Supply side question
 The supply side, represents the ones who give bribes,
they are not necessarily innocent victims who are forced
by corrupt officials to make payoffs to go about their own
legitimate business.
 Both parties (giver and taker) in a bribery deal can gain
from the transaction, they often conspire to defraud the
public.
 A bribery deal can be initiated from the supply side, and
big local business firms, and large multinational
corporations from industrialised countries in particular,
can make proposals which officials in poor countries will
find hard to resist.

18. 18
Corruption
 “… a consensus has now been reached
that corruption is universal. It exists in all
countries, both developed and developing,
in the public and private sectors, as well
as in non-profit and charitable
organizations.” (Myint, 2000)

19. 19
Causes of corruption
 A key principle is that corruption can occur
where rents exist, typically as a result of
government regulation and public officials have
discretion in allocating them.
 The classic example of a government restriction
resulting in rents and rent seeking behaviour is
that of an import quota and the associated
licenses that civil servants give to those
entrepreneurs willing to pay bribes

20. 20
Causes of corruption
 Since the ultimate source of rent seeking behaviour is the availability
of rents, corruption is likely to occur where restrictions and
government intervention lead to the presence of such excessive
profits.
 Examples include trade restrictions (such as tariffs and import
quotas), favoritist industrial policies (such as subsidies and tax
deductions), price controls, multiple exchange rate practices and
foreign exchange allocation schemes, and government - controlled
provision of credit.
 Some rents may arise in the absence of government intervention, as
in the case of natural resources, such as oil, whose supply is limited
by nature and whose extraction cost is far lower than its market
price.
 Since abnormal profits are available to those who extract oil, officials
who allocate extraction rights are likely to be offered bribes.
 Finally, one would expect that corruption is more likely to take place
when civil servants are paid very low wages and often must resort to
collecting bribes in order to feed their families.

21. 21
Causes of corruption
Empirical studies have supported certain hypotheses
 Namely, that there is less corruption where there are
fewer trade restrictions
 Where governments do not engage in favoritist industrial
policies
 Where natural resources are more abundant
 There is somewhat less corruption where civil servants
are paid better, compared with similarly qualified workers
in the private sector (Van Rijckeghem, C and Weder, B
1997, “Corruption and the Rate of Temptation: Do Low
Wages in the Civil Service Cause Corruption?” IMF
Working Paper 97/73 (Washington: International
Monetary Fund).

22. 22
Consequences of corruption
 From economic theory, one would expect corruption to reduce
economic growth by lowering incentives to invest (for both domestic
and foreign entrepreneurs).
 In cases where entrepreneurs are asked for bribes before
enterprises can be started, or corrupt officials later request shares in
the proceeds of their investments, corruption acts as a tax, though
one of a pernicious nature.
 Corruption could also be expected to reduce growth by lowering the
quality of public infrastructure and services and decreasing tax
revenue
 Causing talented people to engage in rent - seeking rather than
productive activities, and distorting the composition of government
expenditure.
 However, it has been suggested that government employees who
are allowed to exact bribes might work harder and that corruption
might help entrepreneurs get around bureaucratic impediments.

23. 23
Consequences of corruption
 One specific channel through which corruption may harm
economic performance is by distorting the composition of
government expenditure.
 Corrupt politicians may be expected to spend more public
resources on those items on which it is easier to exact large
bribes and keep them secret
 For example, items produced in markets where the degree of
competition is low and items whose value is difficult to
monitor.
 Corrupt politicians might therefore be more inclined to spend
on fighter aircraft and large - scale construction projects than
on textbooks and teachers’ salaries, even though the latter
may promote economic growth to a greater extent than the
former.
 This has been supported by empirical research suggesting
that policies to reduce corruption would have large payoffs for
society

24. 24
Is Corruption a Constraint to Growth?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100
%
Neither very
pervasive nor
does it have
impact on growth
Pervasive but
does not seriously
impact growth
Top 1 or Top 3
Developing Country
Developed Country
Source: Symposium Survey, Hong Kong 2006. Total sample: 184 respondents of which 82 were from developing and 102 from developed countries.
% Respondents

25. 25
Consequences of corruption
 If the costs of corruption are so high, why
don’t governments get rid of it?
 A possible answer is that once a corrupt system
is in place, and a majority of people operate
within that system, individuals have no incentive
to try to change it or to refrain from taking part in
it, even if everybody would be better off if
corruption were to be eliminated.

26. 26
Which forms of corruption are
worse?
 Under a well-organized system of corruption,
entrepreneurs know whom they need to bribe
and how much to offer them, and are confident
that they will obtain the necessary permits for
their firms.
 It has also been argued that well-organized
corruption is less harmful because, under such a
system, a corrupt bureaucrat will take a clearly
defined share of a firm’s profits, which gives him
an interest in the success of the firm

27. 27
Which forms of corruption are
worse?
 In contrast, under chaotic corruption,
entrepreneurs may need to bribe several
officials, with no guarantee either that they will
not face further demands for bribes or that the
permits they seek will actually be delivered.
 If multiple agents request bribes from the same
entrepreneur without coordinating bribe levels
among themselves, they are likely to make
excessive demands, with the result that
entrepreneurial activity comes to a halt.

28. 28
International Business Ethics
When business is conducted across borders,
the ethics program takes on added layers of
complexity.
Especially problematic when multinationals
operate in host countries that have:
Different standards of business practice
Economically impoverished
Inadequate legal infrastructure
Governments are corrupt, and
The question arises in the context of different
practices in the central operations and policies
of multinationals.

29. 29
Ethical Relativism or Global
Values?
 Three main responses to the question:
 The ethical relativism believes that there are no
universal or international rights and wrongs, it all
depends on a particular culture’s values and
beliefs - when in Rome, do as the Romans do.
 The ethical absolutism believes that when in
Rome, one should do what one would do at home,
regardless of what the Romans do. This view of
ethics gives primacy to one’s own cultural values.
 In contrast, the ethical universalism believes that
there are fundamental principles of right and
wrong which transcend cultural boundaries and
multinationals must adhere to these fundamental
principles or global values.

30. 30
Government Regulation:
 New global developments on the
criminalization of bribery
 Bribery and corruption top the list of the most
frequent ethical problems encountered by
international managers.
 The World Bank estimates that about $80 billion
annually goes to corrupt government officials.