Bribery and corruption risk: the unseen cost
Issue 16, October 2013
The cost of bribery to business and the wider community is significant, with long term social and economic consequences often unseen and regularly misunderstood.
Bribery and corruption have ranked low on the risk agendas for many Australian businesses, including those with operations in countries where such practices are widespread, according to a Deloitte Australia Bribery & Corruption Risk survey published late last year. This insight is supported by our experience in conducting bribery investigations and risk assessments around the world.
In this context, it’s worth considering the bigger picture. Paying bribes and facilitation payments have too often been seen as simply “the price of doing business” in countries where corrupt conduct is entrenched. But bribery and corruption have a far reaching impact that is not often seen.
The cost of bribery to commerce and the wider community is significant, with long term social and economic consequences. Bribery is not a linear one-off event. Money exchanging hands corruptly from one party to another is often money that should have gone towards the provision of vital national services and infrastructure.
The flow-on impact of this can threaten the financial survival of those most disadvantaged. It widens the gap between the rich and poor and stifles access for those in need of basic healthcare, education, and even food, clothes, and water.
The Transparency International Corruption Perceptions Index includes 183 countries. Of those, 134 are ranked corrupt to a significant degree, and 72 of them are ranked very corrupt. There are tragic human stories behind these numbers, as shown by just two of what are countless examples:
- It is estimated that poor families in Mexico spend one fifth of their income on petty bribes just to have access to basic public services. Corruption in public services in 2010 is reported to have cost the Mexican economy 32 billion pesos or $2.6 billion US dollars
- In Bangladesh in 2010, 84% of households who had interacted with private or public institutions had been victims of corruption. Of these victims, 33% had encountered corruption while seeking basic health care services for their families. Furthermore, payments to corrupt people are often made from money diverted from the food or clothing budgets of poor families.
At the macro level, corruption is estimated to cost the global economy more than 5% of global GDP or $2.6 trillion every year. More than $1 trillion is paid in bribes across the world each year. This is estimated to add 10% to the cost of doing business globally. Corruption and bribery also reduce governments’ tax revenue while increasing income inequality. They divert money from much needed social programs for health, education, and infrastructure. They distort the relationships between citizens and their public officials, facilitate environmental destruction, and add up to 25% to an organisation’s procurement cost.
There is also a serious organisational impact leading to:
- Regulatory investigation, censure and increased oversight
- Criminal prosecution of senior management, individuals, and company-- and the resultant penalties
- Civil actions and liabilities including Proceeds of Crime penalties
- Cost of investigations and remediation
- Management and Board distraction and broader morale impact
- Director disqualification/loss of key personnel
- Loss of business – including on licensing opportunities, Joint Ventures with government, and projects funded by donor agencies
- Damage to reputation and negative media attention.
Australian business organisations, particularly those operating in countries with high levels of corruption, should be on alert to the extent of the global problem, assess their level of exposure to the risks and take care to ensure their governance and workplace culture are prudent and reflective of a ‘no tolerance’ stance.
The social benefits of reducing corruption will lead to healthier, more equal and better functioning societies. Companies that mitigate their bribery and corruption risk can also reap substantial benefits by reducing the risk of being the subject of a prosecution, thereby avoiding the resulting cost of penalties and litigation as well as safeguarding their reputation.