Greased palms equal giant headaches

Greased palms equal giant headaches

The scenario plays out all too often in emerging markets: a company wants to get a new facility up and running as quickly as possible and assigns a manager to deal with regulatory obstacles. The local official who could unjam things suggests getting together over a nice meal rather than simply meeting in the office.

The conversation at the table might focus on obscure zoning issues, or unpublished changes to regulations, or something equally inscrutable. What these issues have in common is that they “need to be resolved” before the project can move forward. The official makes it clear that for $500, he can make them go away. The payment would be illegal, but the company will gain millions in revenue by opening the facility sooner, and the manager has thousands of dollars in bonuses riding on the project’s success. What should he do?

Compliance officers would like to think this is an easy decision. It’s not. In April, The New York Times reported that a 2005 internal investigation at Wal-Mart (a client of our firm) found evidence that executives in the company’s Mexican subsidiary paid more than $24 million in bribes to officials in “virtually every corner of the country” to clear the way for the rapid expansion of the retail empire.

The allegations are unusual only in that knowledge of wrongdoing is said to have subsequently reached the top of the organisation; unlawful payments to foreign officials are certainly no aberration. In the US alone, the Securities and Exchange Commission and the Department of Justice are currently investigating more than 80 companies for potential violations of the Foreign Corrupt Practices Act. European authorities have stepped up enforcement of anti-bribery laws, too.

To try to quantify this type of misconduct, CEB (formerly Corporate Executive Board) surveyed more than 700,000 employees at multinationals in more than 115 countries over the past five years. Only 1% reported observing instances of bribery, a number that sounds low – but the rate is higher in emerging-market countries, reaching 3% in Mexico and 8% in China. And fines for bribery can be extraordinarily expensive.

According to our research, the median fine for a bribery or corruption violation during the three years to June 2010 was $7 million. Add to that substantial legal bills, managerial time spent dealing with the fallout, and possible reputational damage and loss of shareholder value.

Given that bribery can be so costly, why is it so prevalent? Our research suggests that one driver originates at headquarters – multinationals’ increasing growth imperative in emerging markets. When developed economies stagnated in 2008, global companies all had the same idea: we’ll meet our targets by increasing revenues quickly in markets like China, Mexico, Indonesia and Brazil. That change in strategy increased the pressure on local employees to make their numbers, tempting some to break the law.

Two other factors are at work on the ground. First, local officials can tell when a foreign company is in a hurry to get things done, and this gives them leverage to demand payment in exchange for lubricating the bureaucracy. Second, local competitors are often accustomed to paying bribes as a cost of doing business, which can put multinationals at a competitive disadvantage.

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