Guest Post: Collective Action by Multinational Companies–A Recipe for Fighting Corruption in Emerging Markets

GAB is pleased to welcome back Gönenç Gürkaynak, the managing partner and head of the Regulatory and Compliance Department at ELIG, Attorneys-at-Law (Istanbul), who contributes the following guest post:

In too many countries, particularly emerging markets, corrupt public officials and getting rich by taking bribes, and they often seem immune from domestic law enforcement due to their influence over the judiciary. In such situations, collective action by the private sector—in cooperation with civil society—may be the key to changing the rules of this corrupt game. In particular, multinational companies (MNCs) can and should act collectively to require their intermediaries (e.g., distributors, agencies, etc.) to comply with stringent anticorruption rules. Considering that MNCs working in foreign jurisdictions act mostly through intermediaries (e.g. distributors, agencies, etc.) and that, according to the recent OECD Foreign Bribery Report, three-quarters of foreign bribery cases involve intermediaries, using collective action to targeting corruption by local intermediaries can help choke off the supply of bribes that corrupt public officials are so keen to extract.

The collective action strategy suggested here is designed for settings in which many MNCs, as well as large local companies, work with a limited number of local intermediaries that provide assistance in dealing with a sector or government agency prone to corruption; the approach is most effective when other potential intermediaries might be able to compete with the more established intermediaries if given the opportunity. In such a setting, the collective action approach—perhaps initiated by the MNCs, perhaps facilitated by some third party like a civil society organization—could work as follows:

  • First, MNCs should jointly require their intermediaries (i) to recognize and to declare to the MNCs any and all payments to public officials made under any name, (ii) to sign an undertaking stating that they will comply with the local and international anti-bribery legislation (such as the US FCPA and the UK Bribery Act), and (iii) to allow the MNCs to audit their operations and to inspect their books and records to check their compliance. (Many MNCs already impose at least some of these requirements on their intermediaries in high-risk markets, in order to avoid liability under foreign anti-bribery laws like the  FCPA and the UK Bribery Act; the advantage of the collective action approach is that it makes it harder for intermediaries to find any clients if they do not agree to these terms.)
  • Second, the MNCs should further require their intermediaries to agree that the intermediary’s managers and employees at all levels will participate in anticorruption training to be provided by a body chosen by the MNC. This training should offer examples of cases illustrating potential consequences of non-compliance, and should further emphasize that the involvement of the MNCs means that the immunity enjoyed by many bribe-takers does not mean that the bribe-giver is safe, given the potential for prosecutions under the FCPA and similar statutes.
  • In the event that established intermediaries refuse to agree to these terms, the MNCs should approach alternative intermediaries, emphasizing that the established intermediaries were reluctant to agree to the anticorruption terms, and that as a result a new opportunity to work with MNCs is emerging for other firms. This could create a more competitive environment for local firms that provide intermediary services, and put more pressure on the established intermediaries to agree to these terms for the sake of maintaining their business with MNCs.
  • Moreover, as part of their collective action agreement, the MNCs could agree to contact foreign enforcement authorities, like the US Department of Justice and SEC, and the UK Serious Fraud office, if they spot irregularities while auditing their intermediaries, thereby increasing the risk that an intermediary’s wrongdoing will result in sanctions.

As with any collective action initiative, it may be challenging to get a sufficient number of parties to agree to participate. But once a critical mass of MNCs signs on, other MNCs may increasingly understand that not participating in the collective action initiative may entail greater corruption liability risks, and may invite greater scrutiny from law enforcement agencies. Eventually, participation should be expanded to include not only MNCs, but also large local companies. Some local companies—those that are deeply involved in the existing corrupt system—may be reluctant to participate, but for those who wish to break loose from the corrupt system, the collective action initiative might be the way to their commercial freedom.

2 thoughts on “Guest Post: Collective Action by Multinational Companies–A Recipe for Fighting Corruption in Emerging Markets

  1. All good ideas Gonenc!

    Collective action is indeed the missing link in many countries. Towards that end, I believe the human rights community at the national and international levels also has a very important role to play. And on that Rights note, I would also refer readers to the 2011 Ruggie Principles global collective action framework. It also captures the essence of your ideas and contains valuable tools for interested stakeholders. (www.ohchr.org/)

    Some of GAB’s readers may not know that many of these ideas, and more, are embedded in the UN Global Compact. (https://U globalcompact.org.)

    Under the Global Compact, thousands of companies have and are moving in this direction, but certainly many more need to come on-board. Enhanced partnerships and much more interaction with civil society is certainly needed. At present there is very little.

    The Global Compact initiative gives companies and civil society groups the global blueprint and practical tools for putting many of these ideas into action. I hope those interested will take a look and consider its potential.

    Professoruncac

  2. Considering the substantial strides that have been made against corruption by targeting bribe payers, you make a very good point that we ought to think about how to further leverage the private sector. Yet choking off corrupt intermediaries would require basically universal participation by MNCs and I think the collective action problem, which you note, looms quite large. Key to getting MNCs to assume the costs of opting in is proving that participation is in their best interest, regardless of whether other companies join.

    In the human rights context, consumers have played a very important role in incentivizing company compliance with voluntary, international standards. I don’t think anti-corruption efforts would carry the same weight with consumers as, for example, the fair labor or fair trade movements do. Of course, the threat of prosecution is also a crucial stick, which is why I think your idea of a referral process for risky intermediaries is intriguing (in such instances, scrutiny of the intermediaries would probably extend to MNCs doing business with them, too). However, enforcement is more or less an isolated cost and it would be ideal if companies based their anti-corruption commitments around information more concrete than a risk calculation. Along these lines, the Global Compact LEAD participants are working to quantify the impact of corporate sustainability policies. I’d be very interested to see what they are finding.

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