Financial Post G7

Free Search | Search by Year | Search by Country | Search by Issue (Subject) | G8 Centre

Financial Post Articles

SO HARD SAYING GOODBYE TO `MR. 10%': Multilateral efforts to eliminate bribery and corruption in international business face many hurdles

John Mason and Guy de Jonquieres

Financial Times with files from Gillian Tett, Graham Bowley and Robert Chote/FT

Financial Post, Daily: Early Edition, Wednesday, August 6, 1997

The world's richest countries are preparing an unwelcome Christmas present for those who profit from corporate sin. They hope to agree on an international treaty, followed by other tough measures, to clamp down on companies that win business by bribing foreign politicians and officials.

Detailed negotiations began this month in the Organization for Economic Co-operation & Development. It wants to enact a treaty and national legislation to criminalize the payment of kickbacks, end their tax deductibility and subject companies to stricter financial disclosure.

The proposed measures owe much to sustained diplomatic pressure by the U.S., one of the few countries to have outlawed bribery of foreign officials. Since the law took effect almost 20 years ago, the U.S. has complained that its exporters have lost business to less scrupulous competitors from Europe and elsewhere.

The issue is also commanding close attention from the World Bank and the International Monetary Fund, which see it as a big obstacle to economic development and effective governance. The World Trade Organization recently launched talks on proposals to combat bribery by increasing transparency in public procurement.

Many companies appear to share these worries. In a recent survey commissioned by the World Bank, international executives named corruption as the biggest obstacle to doing business in Latin America, the Caribbean and sub-Saharan Africa.

The exact scale of bribery and its impact on global economic activity is unknown. The World Bank says that if bribes equalled just 5% of inward direct investment and imports into developing countries, where the problem is most acute, they would total almost US$80 billion a year.

Corruption has become more widespread in such economies as China and Russia since they opened up to international trade and investment. Michael Wiehen of Transparency International, an anti-corruption pressure group, says the going rate for bribes has soared: ``Mr. 10% has ballooned into Mr. 30% in many countries.''

European companies are balking at paying such inflated kickbacks, according to Prof. Marc Pieth, the Swiss chairman of the OECD negotiations. ``There has been a big shift. Companies are now prepared to say no.''

A spokesman for one large German company frequently tainted by bribery allegations says it makes commercial logic to end corruption. ``There is already enough price erosion in this industry; we need to end the costs of bribery, too.''

Government attitudes may also be changing. One notable convert is Japan, which strongly supports the OECD plan after years of resisting it. Tokyo's shift coincides with its own efforts to shed its reputation for widespread corporate corruption.

These encouraging signs aside, drawing up an effective set of anti-bribery measures -- not to mention getting all OECD members to agree to them -- seems a tall order. Although leaders of the G7 industrialized countries have blessed the talks, enthusiasm varies.

France and Germany harbor the biggest reservations, arguing that it will be difficult to establish rules respected by all. Some critics suspect them of reluctance to give up dubious export-promoting business practices, though Germany has recently proposed legislation to end tax-deductibility of bribes.

Partly because of differences between governments, some important features of the plan remain vague. It is unclear, for example, how the proposed disciplines would be policed if they do take effect and what, if any, sanctions would be imposed on offenders.

Even backers of the OECD initiative concede it is unlikely to be legally watertight. Inspired by the U.S. Foreign Corrupt Practices Act, passed after the Lockheed Corp. bribery scandal in the early 1970s, it has several loopholes. The act's provisions can be evaded, both legally (for example, by linking business contracts with help for aid projects) and illegally (by setting up joint ventures, with the partner outside the jurisdiction paying the bribe).

The point of the initiative, says Pieth, is not to jail as many chief executives as possible, but to change corporate culture. In the U.S., passage of anti-bribery legislation has prompted many companies to establish codes of conduct and train staff to ensure its provisions are met.

Efforts to extend anti-bribery measures are likely to face huge legal hurdles. David Wood, head of international trade at the Confederation of British Industry, says agreement on what are normal or abnormal payments will present problems. Nor will it be easy to reach a workable definition of who constitutes a ``public official.'' Another problem, according to Danforth Newcomb, a partner with U.S. law firm Shearman & Sterling, would be introducing effective legislation across all the OECD's members. Mexico, for instance, is regularly beset by massive corruption scandals.

But, says Pieth, if the initiative was first backed by G7 governments and other big industrial countries such as Switzerland, Norway, the Netherlands and South Korea, it would cover about 70% of world trade. Other countries could join later.

This approach may be seen as too piecemeal. That, in turn, would risk deepening reservations among businesses prepared to comply with the treaty that they would lose business to competitors that continued to pay bribes.

Another shortcoming is that the treaty aims to control bribery by addressing the supply side. There is no attempt to curb demands by officials in many developing countries who have come to see such payments as an essential perk of office.

Admittedly, that part of the problem is far from easy to solve. The World Bank argues that corruption in many developing countries stems from severe deficiencies in the apparatus of the state, which can be remedied effectively only through sustained and sweeping reforms.

If the OECD succeeds in putting flesh on the bones of its anti-bribery initiative, it will have taken the first step in tackling the problem. But if the world's richest democracies are unable to agree on a course, they can hardly blame poorer countries for failing to take action.

Source: This information is provided by the Financial Post.

[University of Toronto G8 Information Centre]
[Top of
This Information System is provided by the University of Toronto Library and the G7 Research Group at the University of Toronto.
Please send comments to:
Revised: February 11, 1998.

All contents copyright, 1997 University of Toronto unless otherwise stated. All rights reserved.