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Monday, March 31, 2008
Perspectives

Minimizing Corruption in Latin America

What can companies in Latin America do to help minimize the risk of corruption? Three experts share their views.
Companies can ratchet up internal compliance programs, conduct due diligence on third parties (who also create liability), and train employees on applicable laws in order to fight corruption in Latin America, experts say. (Photo: US Treasury Department)

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

A recent survey of 900 senior executives worldwide found that, out of all regions, companies operating in Latin America saw themselves as most vulnerable to fraud and corruption (72 percent), but Latin America also showed the least investment in means of addressing fraud and corruption. Why the gap between perceived risk and efforts to address it? What specifically can companies in Latin America do to help minimize such risk?

Matteson Ellis, Senior Associate in the International Department at Miller & Chevalier in Washington, DC.: Companies operating in other regions have already seen substantial penalties result when they and their competitors ignore risks of corruption in business (e.g., Siemens was fined $283 million for bribing Nigerian, Russian, and Libyan officials; Baker Hughes was fined $44 million for bribing Kazakh, Indonesian, and other officials—both companies were forced to hire intrusive independent compliance monitors.) No such significant and expensive headline cases have yet hit Latin America, but the region's wake up call is sure to come. Passive corruption (the offense committed by the official who receives the bribe) has been fought for some time now in Latin America in various ways—calls for greater public-sector transparency, a more robust press, growing enforcement of domestic bribery laws. In contrast, active corruption (the offense committed by promising or giving the bribe) is still largely a hazy concept in Latin American. Why? Partly because enforcement of laws like the US Foreign Corrupt Practices Act (that can apply to US and foreign companies) has not been as common in Latin America as in other regions. Add to that a pervasive view among businesspeople that corruption in business there is inevitable. Ironically, the OAS in 1996 concluded the first international treaty to deal with active corruption. Since then, the body of international anti-corruption law has grown, and enforcement of such laws has improved, but Latin America still lingers behind. There are concrete investments the private sector in Latin America can make in order to reduce risks that employees will pay bribes to win advantages—many subsidiaries of US companies have already begun. Companies can ratchet up internal compliance programs, conduct due diligence on third parties (who also create liability), and train employees on applicable laws.

Peter Schaefer, writer and researcher who has published work recently on property rights in Latin America: Latin America and Africa have invested more in reform and gotten less from it than the other developing regions. Transparency is important, but endemic corruption is not really a failure of criminal law, which is about what you cannot do. Rather, corruption reflects the lack of civil law, which provides rules about what you can do. Because you cannot have commerce without rules, most corruption is really a mechanism to create a predictable rule set. Having surveys that tell you a country has corruption is meaningless, since those who set the rules have to be known to all the players for the system to function. The way to fix corruption is not to lock up the elites who take bribes, but to give the people a transparent, universal rule set; that is, a civil code that creates and enforces rules about what you can do in order to structure their lives and their business. Of course, everyone hates corruption, but the alternative is civil (commercial) anarchy. The informal sector—80 to 95 percent of the populations throughout Latin America—and its gray economy will migrate to a civil code if it proves it can provide a fairer, cheaper set of rules that protects property as well as contracts and other commercial matters.

Silke Pfeiffer, Regional Director for the Americas, Transperency International  & Jermyn Brooks, Director of the Private Sector Program, Transparency International: Generally speaking, businesses reflect the same level of efficiency as seen in their local environment, i.e., they adapt to the public-sector bureaucracy and political landscape, rather than imposing their own standards. So, in environments where fraud and corruption are endemic they tend to be fatalistic and accept that the cost of doing business will be increased because of bribes and that they will lose some assets through fraud. The usual disincentive to corrupt activities is loss of reputation. However, in a society where law enforcement is weak, the costs of introducing anti-bribery systems are perceived to outweigh the costs of being caught in corrupt acts. In addition to this, we observe that in Latin America the concept of a shared responsibility of the private sector in addressing corruption is underdeveloped. In other words, Latin American companies tend to blame the public sector. What can companies do? We recommend 'collective' approaches. We have seen interesting approaches of industry-wide anti-bribery agreements, such as the one facilitated by Transparency International's National Chapter in Colombia (targeting water pipe producing companies), which is currently being replicated in Argentina and Brazil. In this framework, companies agree on joint rules and on mechanisms to enforce these. What is important is that there is commitment from the top and effective enforcement.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

 

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