Definition of Corruption – The abuse of public power for private benefit – world bank

Shadow of the Law

Anti-corruption laws aimed at India Inc have been largely ineffective. But two changes are unfolding: anti-corruption measures are acquiring a global hue and focus is shifting to the supply side of corruption, reports

Transparency International, the global civil-society coalition against corruption, had been pursuing National Aluminium Company, a navaratna public sector undertaking, to include integrity pacts (Ips) in its procurement processes for quite some time. The company deputed a junior officer to sign up, but TI India insisted that Nalco’s chairman & managing director ought to make the affirmation for it to make meaningful impact down the line. “Strangely, the CMD’s office was reluctant and we left it at that,” recalls Ashutosh Kumar Mishra, Director (IP), TI India. “Later, this February, the CMD was arrested by the CBI on charges of corruption. Nalco now wants to adopt the IP process.” A relatively new concept in India, IP is a global tool developed by TI. Companies and vendors sign an undertaking that no bribes, gifts, kickbacks or facilitation payments will be asked for or given during procurement.

Members of civil society, designated as independent external monitors (IEMs), function as neutral overseers; in the event of a violation, they are the first stop for grievance redress. Take the case of Central Coalfields, which invited tenders for a coal washery. Monnet Ispat won the bidding, but a competitor, Aryan Coal Beneficiations, was unhappy and demanded re-tendering. The management asked the IEM to step in. The IEM heard out all bidders, inspected documents, consulted experts, made his evaluations and upheld the decision. It was accepted by all, preventing the issue from spiralling out of control, leading to delays and litigation. An IP is a legal document and a process. Forty PSUs have signed up. ONGC was the first in 2005; by 2010, the oil major had referred over a 100 cases to IEMs, who oversaw contracts worth . 150,000 crore. Although private firms bid for PSU contracts in large numbers, the private sector hasn’t really bitten into the concept. “Many of the private companies, barring multinationals, look upon IPs as merely another set of documents to be signed with the tender papers,” laments Mishra. “It’s a fig leaf for them.” The efficacy of IPs in India remains untested. “If you ask me if IP is working, maybe it is, considering the drop in disputes and litigation,” says DT Joseph, former secretary, ministry of shipping, now IEM for the Shipping Corporation of India. “But if you ask me if bribery and corruption has gone down, I just don’t know. It’s difficult to gauge.” TI India is in the process of conducting an impact study on IPs. While TI grapples with its work on hand, the introduction of IPs and the Nalco episode underscores two significant trends: globalisation of anti-corruption initiatives and the shifting of focus to the supply side of corruption.

BEYOND BOUNDARIES

Anti-corruption initiatives are increasingly acquiring a global hue, be it of the voluntary kind like IPs, the UN Global Compact’s 10th principle and the Extractive Industries Transparency Initiative, and also newer legislative measures like the Bribery Act of the UK, the implementation of which transcends national boundaries. The new UK bribery law, introduced from July 1, is similar to the Foreign Corrupt Practices Act (FCPA) of the US; in fact, it’s more severe, even disallowing facilitation fees or ‘speed money’, which finds safe harbour in the FCPA. The UK law puts the onus on companies to prevent bribery and corruption, also by individuals associated with them. And it goes beyond borders. A company headquartered in India with operations in the UK, or one that employs British citizens, is now answerable to the British Serious Frauds Office even if the offence has no connection to the UK. The FCPA, especially in the last decade, has ensnared a host of multinationals for bribing officials in the US and emerging markets, including India.

In 2010, companies in violation of the FCPA paid $1.8 billion in penalties. For instance, the London-headquartered liquor major Diageo Plc, in July, agreed to pay $16 million to settle bribery charges against it for offences in India, Thailand and South Korea. Diageo India was quoted as a ‘relevant party’ in the FCPA case, which involved illicit payments of $1.7 million “to hundreds of Indian officials”, including those from the military’s canteen stores department. By comparison, India has a rather inadequate Prevention of Corruption Act, 1988, and the Prevention of Money Laundering Act, 2002. “We also need to be more prescriptive in our regulations,” says Arpinder Singh, head of forensic at Ernst & Young. “The UK and the US Acts have well laid out procedures, which we lack.” The Indian government, to comply with the demands of the UN Convention against Corruption, which it recently ratified, has introduced a rudimentary Bill on prevention of bribery of foreign officials—something on which Indian companies are among the worst offenders from the leading economies (See graphic: Corruption Inc).

CORRUPTION REDEFINED

The Extractive Industries Transparency Initiative (EITI) is of particular relevance to India, in the wake of scams and disputes that have hit the mining and the oil sectors lately. The Norway-based EITI, launched in 2003, is a coalition of governments, companies and civil society. It seeks to ensure that natural resource benefits all, by outlining standards and deploying external financial, physical and process audits in extraction operations. EITI supporting companies include Areva, ArcelorMittal, BHP Billiton, BP, DeBeers, Exxon Mobil and Shell; countries include Australia, Canada, Germany, Japan, Norway, Qatar, UK and US. India, however, has been stalling. “In recent years, a number of efforts to engage the government of India and companies like ONGC in the EITI were undertaken,” reveals Samuel R Bartlett, director-Europe and Asia, EITI. “To date, the government hasn’t expressed any interest in becoming an implementing country.” This when the EITI is making headway in fostering transparency and curbing corruption in mining and oil. For example, In Nigeria, an EITI audit in 2006 confirmed a hole of $67 million in royalty payments to the government.

The mining and the oil sectors, globally, have come under the scanner of corruption initiatives like never before. In fact, a change in the very definition of corruption is being sought to reflect new realities.

The working definition of corruption put forth by the World Bank and TI, respectively, is “the abuse of public power for private benefit” and “the misuse of entrusted power for private gain”. A recent paper by Norway’s U4 Anti-Corruption Resource Centre, titled ‘Grand Corruption in the Regulation of Oil’, broadens the scope and redefines corruption as “the manipulation of framework conditions to attain exclusive benefits to individuals or groups at the cost of social benefits”. The paper explains the inherent complexity of regulations in the extractive sector. This is something that has parallels with the spate of controversies unfolding in India—the telecom 2G spectrum scam, allegations of gold-plating of costs in the D6 gas fields in the Krishna-Godavari Basin, and the plunder of iron ore mines in Bellary.

This para on ‘grand corruption’ from the paper does touch a chord: “The oil industry is usually governed at the highest political levels, and corruption usually involves political representatives at this level. These actors have different opportunities to benefit from corruption as compared to, for example, civil servants. They will not necessarily bend rules in secret, but will rather alter the rules of the game quite openly, or decide on significant exemptions from written regulations. The benefits they obtain through some form of corruption may be far more than a personal bribe, and may be tied to development aid, macroeconomic loans, party contributions, various political and diplomatic quid pro quos, intricate arrangements to increase revenues controlled by incumbents, or support of industries where politicians have personal stakes.”

SUPPLY SIDE OF CORRUPTION

The second significant trend is the turning of the spotlight on the private sector itself and its players—the supply side of corruption. There is evidently a rather reluctant—but growing—urge to look inwards, especially in the wake of the nationwide campaign against corruption triggered by Anna Hazare. As in most cases, in the Nalco case too, the probe lights were on the bribe-taker, the company’s CMD. The alleged bribe-giver, the Bhatia Group, is given a rather benign view, although some minor official was arrested and questioned. At the macro level, the stifling of competition by a few companies that influence the legal and policy environments is a serious concern that is beginning to be articulated. In recent times, a small clutch of business leaders like Ratan Tata, Deepak Parekh, Anand Mahindra, NR Narayana Murthy, and Anu Aga have been vocal about it. Speaking at a Harvard Business School meeting in Mumbai last week, Ratan Tata said: “Corruption has become worse after liberalisation…Prior to 1991, corruption was in the form of granting licenses. Now, it’s replaced by the award of contracts and in changing the terms of contractual obligations.” This trend is what the World Bank experts often term as ‘state capture’. It is now agreed that, in a ‘capture economy’, a few companies benefit in the short term—at the expense of the long-term health and growth of the private sector. A World Bank study says the overall growth rate of firms in a capture economy is about 10% lower than a non-capture economy over a three-year period. Several recent Indian industry surveys suggest the tide is turning.

A 2011 KPMG survey says corporate India now believes it is time the supply side of corruption is tackled head-on. About 68% of respondents in the survey said that corruption was induced by the private sector. “Companies resort to different ways and means to gain business due to heightened competition,” says Deepankar Sanwalka, head of risk and compliance at KPMG. “These include facilitation payments, cartelisation and (ensuring through illegitimate means) repeat procurement contracts.” An ET-Synovate survey, which polled 181 middle managers in eight cities from August 19-23, reflects the challenges and dilemmas of the Indian private sector. Only 36% of the managers polled felt their company would refrain from offering a bribe at the cost of losing business; 54% felt otherwise. The survey further shows the private sector has been unable to meaningfully address the issue of bribery and corruption. About 55% of the respondents were unaware about their company’s policy or stand on bribes, and 56% said they had never discussed the ethical dilemma of bribery with their top management. The industry chambers also have done precious little to address this issue in a comprehensive manner. Around the time Hazare began his fast, the Confederation of Indian Industry (CII), issued a hastily drafted ‘code of business ethics’ as a guide to each employee of CII member-companies. The CII code is a compendium of good intentions, starting with the need to serve national interests. But the mere issuance of codes and signing on the dotted line cannot stamp out bribery and corruption. It only creates a smokescreen and delays robust action, legislative or otherwise. Little wonder, Deepak Parekh, chairman of HDFC, thinks it’s about time for a UK Bribery Act sort of law for India with a clear focus on the corporate sector.

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Posted on September 2, 2011, in India, News and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink. 1 Comment.

  1. India has shown solidarity and maturity of its democracy. Though it is currently battling to find the answer and resolution to the unabated evil of corruption, which is also a global phenomena.

    I would like to differ with the viewpoint of New York Times article below. The warning on economic growth slipping below 8 may be temporarily, but still it is not as bad as US or some of the European countries. The India Growth story is intact.

    Once, the bill for anti corruption is tabled in the parliament and passed it as a law or dealt with by creating an Independent constitutional body (like election commission of India) as suggested by Rahul Gandhi, it will be a paradigm shift for entire nation. It will have very positive effect on its economy too and will change the outlook.

    Anna Hazare, the member of civil society followed religiously the slogan of gandhiji “Find the purpose, means will follow” and result is in front of us. It will be a reference and case study for many other countries too.

    in response to :

    New York Times article (during India Against Corruption movement by Anna Hazare)

    http://www.nytimes.com/2011/08/27/business/global/india-adds-a-slowing-economy-to-its-corruption-woes.html?_r=1

    on

    Unrest Builds as India Adds a Slowing Economy to Its Corruption Woes

    “Today, the economy is running on the engine speed achieved some time ago,” said R. Gopalakrishnan, an executive director at the Tata Group, India’s largest business conglomerate. Stressing that he was speaking for himself and not his company, he added, “It’s not sputtering to an end, …

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