Thanks to Google those who have had a curse put on them can find numerous ways to lift it: from drinking a special potion on the first night of the waxing moon to repeating a certain incantation 13 times while holding a rabbit’s foot. (Here, here and here for useful sources.) But Google is not nearly so helpful for policymakers looking to lift the resource curse: the corruption, violence, and misgovernment that befall a poor country with plentiful quantities of hydrocarbons or other natural resources.
The best Google does for them is tout the Extractive Industry Transparency Initiative, a voluntary compact where the government agrees to disclose the monies it receives from the companies that produce its resource and the companies agree to report the monies they pay government. As the 300,000 plus “hits” on EITI in Google explain, the theory is that civil society will use the disclosures to hold government and the companies accountable. Unfortunately for the policymaker looking for solutions to the resource curse, Google will also pull up a long list of studies (here and here for examples) showing that so far it has had little to no effect on corruption and governance in resource rich poor countries and that at best the relief it promises is many years away.
With this post I hope to persuade Google’s powers that be to modify the search algorithm so that when a user enters “resource curse – how to lift” something besides “EITI” is returned. That something is
“Compliance program.” A user clicking on this entry would learn that a growing number of multinational firms are establishing programs setting forth the ethical precepts they expect their employees to observe, educating them about the precepts, and imposing sanctions, up to and including termination, for failing to adhere to them. The trend is now so pronounced that there is an internationally agreed standard for such programs: ISO 37001, Antibribery Management Systems. Published in October 2016, it identifies the provisions that any antibribery/anticorruption program must contain to be taken seriously.
The entry would explain that these programs were not established because a wave of civic responsibility suddenly swept over the private sector. Rather, compliance programs originated as a response to an American law providing that, when determining the fine to levy on a corporation for violating a criminal statute, a federal court should consider whether it had “an effective ethics and compliance program.” Those that did will have the normal fine imposed for the violation cut, often significantly.
The idea of providing private corporations with an incentive to self-police has spread along with the spread of antibribery legislation. In the U.K. a corporation whose employee is caught paying a bribe is itself guilty of the offense of “failing to prevent bribery” unless it can show it “had adequate procedures in place” to curb bribery. The Brazilian Clean Companies Act provides for reductions in the standard fines imposed for legal violations if a company shows it has an effective compliance program. In Germany directors can be held liable if their company does not have an adequate corporation compliance program.
Although the list of countries requiring companies subject to their jurisdiction to have a compliance program or offering them powerful incentives for having one continues to grow, Google cannot find a single developing country endowed with natural resources among them. Not one developing nation with reserves of oil, natural gas, hard minerals, or other resources demands that the companies producing them have in place an effective antibribery/anticorruption program, one subject to periodic audits by an independent third-party to ensure it is not a sham.
There is simply no reason why these countries shouldn’t require compliance programs and three good reasons why they should.
1) Enhanced enforcement. The most obvious reason for requiring companies to implement compliance programs is it bolsters the host government’s own enforcement efforts. Enforcing an antibribery law takes a small army of accountants and investigators able to sort through the often complex transactions used to disguise corrupt payments. Skilled accountants and investigators are, however, a commodity in short-supply in developing states. A compliance program that makes the payment of a bribe a firing offense, that requires employees to accurately record all expenditures, and that uses random audits to catch violators helps fill the gap. It shifts part of the enforcement burden to those better placed to bear it, providing an important adjunct to public enforcement efforts.
2) Screen out corrupt firms. Companies whose method of doing business is built on buying off public servants will likely pass on business opportunities in countries that require them to put in place a compliance program. To be sure, some may think they can create a program that looks good on paper but is in fact a charade. That is why countries must include a requirement that a company’s program be audited at regular intervals by reputable third-parties.
3) Spur a race to the top. It is no secret that corruption in some resource-endowed poor countries is so pervasive that it scares many companies away. Business can’t be done without payoffs, and the risk of prosecution for a violation of the FCPA, the UK Bribery Act, the Brazil Clean Company Act, or similar laws is simply too great to take a chance. The result is that the competition to exploit the resources of poor nations is often a race to the bottom, the winner being the one willing to bribe the most and based in a country whose authorities could care less what their companies do elsewhere. Forcing those competing for the right to produce a nation’s resources to have an effective antibribery/anticorruption compliance program will turn the competition around, giving the honest the competitive advantage.
A Google search for “lift a curse” returns a plethora of sources offering immediate, guaranteed remedies for those who have been cursed. Regrettably, implementing a compliance program is no guarantee a resource curse will be instantly lifted. But an antibribery/anticorruption compliance program is surely an important element in driving the curse away. And it is certainly long past time to treat EITI as the sole way of lifting it.
While I am a big fan of the EITI, I would never claim it’s a panacea to the resource curse. Part of the reason why so many developing countries have signed on is that it doesn’t take much governance capacity to conform with its requirements. While it is a great idea for a resource-rich developing country to require extractive firms to comport with ISO 37001, Antibribery Management Systems, wouldn’t enforcement, auditing, etc. demand too much from the government in terms of technical forensic accounting skills? I think the other reason that the EITI is attractive is its ‘softness’–what do you think it would take to convince governing elites to pass such a law?
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Thank you for your post. I agree that these resource-rich countries should certainly consider requiring companies to have compliance programs. As mentioned in your first point on enhancing enforcement, investigating and going through complex transactions takes a certain skill-set that is not necessarily easy to find (short supply). I would suggest though that aside from just shifting the burden to the companies, building these skill-sets and increasing the number of trained professionals in these countries could also aid in detection/prevention.
Most companies involved in the resource business pour funds as election funding or personal funding. Sometimes this is done by a government of one country to another government too. So, the main issue is corruption and not the intention to make suitable laws. Also, since public is not aware of such misuse and also lack of unity among the voters for the cause makes the problem more severe without a solution.