Developing States Should Demand that Firms Doing Business with Them Have an Anticorruption Compliance Program

In December 2008 the U.S. federal government instituted its Contractor Code of Business Ethics and Conduct program.  Since then, any firm awarded a contract of $5 million or more requiring at least 120 days to perform must establish within 90 days of the award an anticorruption compliance program that i) contains a written code of business ethics and conduct, ii) trains employees on ethics and compliance periodically, and iii) has an internal control system able to discover improper conduct.  The rules also require that the program be overseen by someone of “sufficiently high level [with] adequate resources to ensure [its] effectiveness.”  When a review found government agencies were not systematically checking their contractors for compliance, the regulations were amended to require the government employee responsible for contract execution to verify that the contractor had an anticorruption compliance program in place.

No developing state now imposes any similar requirement on those with which it contracts — at least according to interviews with development agency procurement staff and internet searches.  But there is no good reason why developing countries should not mandate such a program and good reasons why they should.

Two objections to requiring firms to have an anticorruption compliance program are commonly heard. The first, raised by some procurement staff at the World Bank, is that while many firms headquartered in OECD countries have them, many headquartered in non-OECD countries do not, and thus were developing countries to mandate them, it would privilege OECD businesses at the expense of non-OECD businesses.  This is no objection at all.  The purpose is to “level up” businesses doing business in poor countries — countries where corruption is often quite harmful — to the OECD best practice anticorruption standard.

The second objection, often linked with the first, is that a compliance program can be a sham, something for show with no real teeth.  This is certainly a possibility, and a July New York Times article reports that a major hedge fund accused of numerous securities law violations had what on paper appeared to be a robust compliance program. That some may not obey a law is not a reason not to have a law.  Were this a controlling precept, murder would still be legal in all countries.

The first reason developing states should require firms doing business with them to have an anticorruption compliance program is that it will help ensure that companies that genuinely want to conduct their business with integrity are observing practices that will ensure they do.  Fines, debarment, and possibly even jail terms for failing to adopt practices most likely to prevent corruption can focus the mind of a firm’s senior executives in ways that generalized appeals to corporate citizenship or responsibility may not.  Moreover, where executives within a firm are divided on the value of integrity, mandating a program may strengthen the hand of those favoring integrity.

The second reason why developing states should demand firms have a compliance program is to provide one more trap for the corrupt unwary.  Some firms may be clever enough to operate a compliance program that can pass audit muster while engaging in corruption, but more likely, most will not.  Suspicions of firm wrongdoing will trigger a review of the compliance program, and a sham or paper one can be easy to spot, far easier than proving outright bribery.

The move to require firms to institute anticorruption compliance programs is gaining ground.  Along with the U.S, the 2010 U.K. antibribery law now in effect mandates British firms or those subject to British jurisdiction to have one and German and Brazilian authorities also provide good reasons for firms to have one.  The UNODC, World Bank, and OECD have published a best practices guide to corporate compliance programs, and as Matthew explained in an earlier post, the corporate compliance movement is now so widespread that an effort to certify their quality is now underway. The time for those states most at risk of harm from corruption to demand firms police themselves is here.

12 thoughts on “Developing States Should Demand that Firms Doing Business with Them Have an Anticorruption Compliance Program

  1. Rich, very Interesting post. I’m wondering whether you could elaborate on the incentives of the politicians in this case. Assuming each politician is a self-interested individual motivated by money and power rather than Long Run anti-corruption goals (simplistic I admit). Lets say money is a function of the politicians normal income plus corruption income and power is a function of the economical welfare of the country and the reputation value of being a “good” politician. I think the main benefit would be any positive PR resulting from the anti-corruption compliance program (ACP). This benefit must be weighed against (1) cost to foreign firms and the deterrence to investment of this additional cost; (2) cost to domestic firms if it is implemented both for domestic and foreign firms; (3) personal loss in potential corrupt payoffs. The third cost is for the economy, but the other two less so.

    Furthermore I imagine the worse the local institution, the more valuable the ACP would be. Unfortunately the worse the local institution, the more likely the politicians are corrupt and more corrupt politicians are less willing to cut off their corruption income stream.

    All is to say don’t let the fox guard the chicken coop — politicians in developing countries have too much to lose by imposing a heavy regulatory burden on FDI. In addition spotty requirement by some but not other developing countries would amplify any anticompetitive fate of the compliant country. In other words to even out the playing field we really want corporations to face the same ACP in every developing country. Thus the burden of requesting ACP should be on the incorporating countries of the multinational corporation, which happens to be, in most cases developed countries.

  2. Rick,

    This is all very persuasive to me, but I wonder if perhaps you may be dismissing the first concern — the difficulty for non-OECD firms to meet requirements comparable to those applied to US contractors — a little too quickly. Part of the objection might indeed be some notion of “fairness,” and I find your rejoinder compelling, but I think another important consideration is political: developing country leaders might be loath to adopt and enforce a requirement that might put many local firms (often firms with close ties to the government, even in cases where they’re not actually corrupt) out of business. And there may be an efficiency concern as well. Imagine that contractor X is a domestic (developing country) firm and Y is a multinational; imagine that because firm X is local, it better understands the needs of the government and could do a better, more responsive job on some dimensions–but the corruption risk is higher. Suppose, however, that the higher corruption risk is outweighed by the other factors. If the government insists on a fancy compliance program that only firm Y can afford, then the government might be worse off (even if corruption in the project is less likely). I realize that may seem like a fancy hypothetical example, and it’s obviously oversimplified, but it’s meant to illustrate the fact that there may be real costs associated with insisting that local firms adopt safeguards that are simply not feasible for them.

    This is not to say that developing countries shouldn’t move in the direction you suggest. I agree 100% that they should. But perhaps that move should be accompanied by more affirmative efforts to help developing country firms, in your words, to “level up.” I’m not sure exactly how that might be done, but perhaps there might be a way for NGOs, IFIs, or other organizations to provide appropriate subsidies or technical support to those firms (or, for that matter, small- and medium-sized firms from wealthier countries).

  3. One other question: The title of your post states that “developing states should demand” that their contractors have an anticorruption policy in place. One question that might follow, if we decide that the answer is yes, is whether the international community should demand that developing states demand that their contractors have an anticorruption policy in place. I ask in part because there’s been much discussion, on this blog and elsewhere, about what instruments like UNCAC do or should require. Should the anticorruption community push for an interpretation and/or amendment of UNCAC that would require signatories to have a policy along the lines of what the US currently has?

    • Matthew,

      The place to start would be with the international financial institutions. If the African, Asian, Inter-American and World Bank all insisted that contracts above a certain size financed with their funds contained compliance requirements, this would likely create unstoppable momentum. The banks could also serve as centers of advice on how to implement and oversee programs.

      The soon to be created Chinese-backed infrastructure bank for Asia might resist, and the Asian Development Bank and World Bank might say that this would be them at a competitive disadvantage in lending in Asia. It might at first but the public pressure to follow the lead on what I think is such an intuitively appealing reform might bring it along quickly.

  4. I completely agree with you, but often devoloping states forget about this isue of anticorruption fight, because they focus is on the problems that they are dealing in public sector. I m personaly a member of an working group in the process of developing new anticorruption strategy in one devoloping state. I am trying to convince other member of working group that one part of strategy should have some which deal the integrity oher reletad anticorruption activities in private sector, but some of leading members dont considered essential anticorruption fight in private sector, especially in developing states. My opinion is that fimes, and especially multinational company, must must include in their business minimum standards as recommended in the UNODC ANti-Corruption Policies and Measures of the Fortune Global 500. That standards (measures) are : Communicating the compliance policies, Gifts and entertainments, whistle-blowing , Facilitation payments etc.

  5. Thanks for all the useful comments and critical questions. Am working on anticorruption strategy now with a developing state so have little time to do anything more than acknowledge the response.

    Matthew, I don’t think it that costly for firms to develop a compliance program and there are surely many, many places they can go for help — the UNODC, World Bank, OECD handbook I cite. The U.S. Chamber of Commerce’s program for small and medium sized businesses. Etc.

    Meng Lu, if the issue is fought out in public, I don’t see how an elected official could oppose requiring firms to have a program. For both substantive and political reasons I think any official opposing it would find it very hard to argue against.

    • You may be right that we shouldn’t exaggerate the costs of developing and implementing an effective compliance program — but we shouldn’t underestimate them either. Nor should we underestimate the “human capital” requirements. While it’s very easy for firms to develop a “paper program,” my impression — at least from talking to people who work in the compliance area — is that it’s much more difficult and expensive to maintain a program that actually works, and it requires well-trained, knowledgeable compliance officers. You’re probably right that there are lots of places firms can go for help, though I don’t know very much about the existing resources and would love to learn more.

      To be clear, I’m not trying to let developing-country firms or governments off the hook, and I actually agree with you that _all_ governments (and all international organizations) should require their contracting partners to have adequate anticorruption programs in place. I’m just saying that to achieve that goal, we may need to take seriously the costs such a requirement might impose on less-sophisticated firms in poorer countries, and think about whether there’s anything we could or should do to support their efforts to raise their compliance programs to international standards.

  6. Rick, I very much enjoyed reading this post. However, I wanted to echo some of the concerns raised by Meng regarding the potential difficulties in convincing developing countries to adopt this system. One of the key barriers that I see to implementing this type of program is that it will potentially require a considerable degree of regional cooperation amongst developing countries. As Matthew has noted, while it may not be particularly difficult to adopt a written code, or even to hold sporadic anti-corruption trainings, developing an effective internal control system (the third requirement you noted) could be quite costly in terms of the requisite investment of personnel and capital. Moreover, setting aside these potential costs for a company to begin doing business in a developing country, this system will serve to expose companies to additional liability including, as you suggest, fines, debarment and, possibly, imprisonment (which may be imposed based upon different criteria regarding what constitutes a ‘sham’ or ‘effective’ system from country to country).

    The combination of these two factors, to my mind at least, could potentially serve to deter companies from investing in a particular country, especially if there are other states in the region who have elected not to adopt this requirement where they could set up operations instead. (I’m not even convinced that this phenomenon would be cabined to ‘bad actors’ – i.e. companies who would elect not to invest in a country with this program because they perceive themselves to be corrupt). If my hypothesis is correct, I think that it could present a genuine conflict for politicians who are committed to combatting corruption but who are also concerned about attracting foreign investors/corporations and who believe that being the first state in their region to adopt this requirement may serve to harm the state’s economic growth. In fact, I’m not convinced that even fighting this particular issue out in public would deter some politicians from legitimately raising concerns about this policy.

    In summary, while I agree that this policy is an important step in combatting corruption and believe that developing countries should be encouraged to implement this system, I think it may be necessary for advocates to be attuned to the potentially detrimental economic effects this policy may have upon some states, at least in the short term, as well as to focus their efforts on promoting regional adoption of this system.

    • Lauren,

      Thanks for your comment. A couple of responses —

      1) Remember that the requirement would be imposed on those from which the government procures goods and services — not on those firms that are simply investing in the country.

      2) I don’t think an internal control system is as expensive or burdensome as you might think. Companies of any size will have the basics — a general ledger system from which financial reports are prepared on a regular basis. That is the nucleus of the system. How elaborate the system needs to be beyond watching how monies are spent (to avoid the creation of slush funds such as those American companies were discovered to have created during the hearings on the Watergate scandal) will depend upon the size and operations of the company. Beyond accounting controls. the most critical issue is probably policing the firm’s agents. This begins with a check of who they are before hiring them, and no well-run firm of any size hires an agent without running a check on his or her credentials.

      3) The U.S. procurement rules only require compliance programs from firms executing contracts of more than $5 million to be performed in 120 days or more. Developing states could adopt minimum tender sizes as well to ensure they don’t burden really small firms. Indeed, they might phase in a compliance program by starting with large contracts where the risk of corruption is high — say large contracts for the construction of public works or the development of software systems..

  7. This certainly seems like a positive toward fighting corruption in developing countries by helping to create a culture of anti-corruption.

    Once there are programs in place, what should a review entail? It seems that the threat of review may be enough in some instances to ensure actual compliance with whatever an acceptable anti-corruption program entails; but, in instances where a anti-corruption program appears to be a sham or is at the very least suspicious, what kind of investigation would follow and by whom? Obviously, some nations are better equipped to handle review of a business’s anti-corruption program than others.

    I also wonder what the ramifications would be if some developing countries make these requirements while others do not? Similarly situated nations, one with the requirements and one without, would have different levels of attraction to certain firms. Certainly no firm wants to be known as a firm that seeks out countries without these requirements, so global public relations fallout of a company purposefully choosing nations with the lowest anti-corruption requirements may be enough to encourage firms to earnestly develop these programs. Perhaps a wave of developing nations making these requirements would lead to firms developing anti-corruption programs, even for contracts with nations without such requirements. Developing corruption-free relationships with firms could likely lead to longer, more stable relationships between the firms and the countries.

    Certainly, this seems like it’d be a great step in the growing discussion that’s likely to be spurred by the proliferation of best-practices guides for various anti-corruption or anti-bribery programs in many developing nations. But it seems that the efficacy of these efforts turns more on the ability for a nation to effect a review of anti-corruption compliance programs in suspicious or sham circumstances.

    • Nice point about the reputational effects of companies declining to do business in countries that require compliance programs. Countries with limited resources might require their contractors to have an independent firm audit their compliance programs. Not to certify their effectiveness but simply to report on whether they are shams or not.

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