Global Integrity

December 2006

Global Integrity

Transparency International's David Nussbaum is fighting for a world that is free of bribery and corruption.

Steven Alvarez
Freelance Writer

There is an anecdote of a Shell managing director traveling in Africa, says David Nussbaum, chief executive for Transparency International (TI), that best reflects how companies can take a hard line against corruption overseas. The executive was stopped by police as he and his African driver traveled in a company vehicle. The policeman indicated that their onward travel would be facilitated by a modest cash payment. The driver and the policeman argued for several minutes. Moments later, a senior police officer arrived and identified the employees and the vehicle as Shell assets. He told the patrolman to let the car go because everyone knew that Shell won't pay.

According to Nussbaum, zero tolerance reputations like Shell's are hard earned. TI is helping bring about this type of anti-corruption climate, he says, by approaching system change from the inside, out. The Berlin-based organization works with government, the private sector, and other parts of civil society to tackle corruption through a network of international chapters in 100 countries. But TI is not in the business of investigating or exposing corruption; its role is to identify the problem, educate people about its damage, and issue recommendations to improve the situation. Nussbaum says the organization's efforts are paying off: Today, bribery is illegal almost everywhere in the world. Still, he admits much work remains to be done globally, as overseas bribery by companies from the world's export giants is still common, despite the existence of international anti-bribery laws criminalizing the practice. On Oct. 4, 2006, TI released its 2006 Bribe Payers Index (BPI), the most comprehensive survey of its kind that shows nations are not doing enough to clamp down on overseas bribery (see "How They Ranked" at right — click to enlarge). Although the 2006 BPI has "disheartening" revelations, Nussbaum says he believes internal auditors today can play positive roles in their organization by praising solid ethical practices and leveraging their skills and resources to usher in an era of higher global integrity.

Q. Have governance reforms from the last few years had an impact on global fraud and corruption trends?

They have made people much more conscious of corruption, bribery, and fraud as issues. Also the impact of rules and regulations such as the U.S. Sarbanes-Oxley Act of 2002 has been, perhaps indirectly, to put pressure on organizations to improve their internal controls. Further, they have significantly increased the role of the audit committee in corporate governance, and that has resulted in a rise in the status and influence of the internal audit function and improved its ability to access company leaders and the audit committee, to bring again more pressure on company behavior and control systems. Of course, there are aspects of the governance reforms that are controversial, but the focus on having the right internal controls, governance structures, and systems with appropriate safeguards and independence is important.

Q. As you see cases of scandal and corruption in both private and public settings, do you ask yourself, "where are the auditors?"

Well, we know that the external auditors are looking at the overall financial statements and whether they correctly represent the company's financial position/results. And, although they are seeking to detect fraud that might have a bearing on those high-level financial statements, they're not specifically focused on day-to-day operational details. That is where internal auditors have a greater opportunity to detect fraud, partly because they should know the company's systems from the inside even better than the external auditors. Internal auditing tends to be more system and control focused, not primarily financial statement focused. Internal auditors should be looking more into the day-to-day operating details in individual business units. TI believes that the internal auditors must have the freedom, resources, independence, and capability to do their job well, and that should help ensure that corruption and bribery are not likely to occur in leading companies.

Q. In what way do you think organizations could improve most in terms of fighting corruption?

There are four steps companies can take. The first is to adopt an explicit stand at the top level of the organization in relation to corruption. Second, companies need to translate their organizational stand into operational reality for all staff and associates throughout every country in which they operate. TI's Business Principles for Countering Bribery, which is available on our Web site, offers a six-step approach for companies to operationalize and implement those principles. The third step, monitoring how the company is doing, can be performed by internal auditors. That people know there is going to be a monitoring mechanism influences the degree to which they take seriously the need to operationalize the principles. The fourth step is to report publicly on the company's business and anti-bribery strategy implementation. Some companies find this challenging because bribery and corruption are always difficult subjects to talk about to the public, but they've become more used to this in health, safety, and environmental areas. They are more transparent about the experience they had and the occasions they may not have achieved the standards to which they aspired. TI has surveyed companies on their reporting of anti-bribery activities and published in conjunction with the United Kingdom's Association of Chartered Certified Accountants a report on best practice in corporate reporting on bribery and corruption [see www.accaglobal.com]. We've highlighted several large multinational companies that have reported on some particular aspect of their anti-bribery provision in a very positive way.

Q. The Organisation for Economic Co-operation and Development's (OECD's) Convention on Combating Bribery was considered a step forward in fighting international corruption. Has its impact met the original expectations?

There has been a lot of progress, but monitoring and enforcement need to be more vigorously pursued. TI has reviewed the implementation of the convention in the OECD countries — and a few others that have ratified it — and while the convention outlaws overseas bribery, countries need to follow up on it. Although the United States has a record of investigation and prosecution, partly because of the U.S. Foreign Corrupt Practices Act, which was enacted some 30 years ago, other OECD countries have a rather dismal record, so far at least, of investigating and prosecuting cases of overseas bribery. We would like to see a real step up on that, partly to eliminate any doubt in people's minds that countries mean what they say when they pass these laws and that people should abide by them. This requires government to act in a consistent way. For example, export credit agencies need to take a vigorous line on expecting companies they support to behave in accordance with the law of the land, both the law of the OECD country in which they're based and the law of the country in which they operate.

Q. Could you explain briefly how you came up with the BPI?

TI publishes the BPI to measure what is sometimes called the supply side of corruption — or where the bribes come from. The BPI reviews the experience of business people operating worldwide in 125 countries. We surveyed more than 11,000 business people and asked them to tell us about the prevalence of bribes or undocumented payments in companies from 30 countries. These are people whose experience is based on reality, and we then convert their responses into an index that ranks the 30 countries and gives them a score on the basis of how likely it is that companies from those countries are engaged in bribery when they're doing business abroad.

Countries all around the world are trying to tackle corruption — they're passing laws, setting up institutions, trying to have effective mechanisms to enforce high standards of integrity — but those efforts are substantially undermined if companies from OECD countries engage in bribery when doing business internationally. It undermines the efforts of countries to improve their own governance. In the long run, it's actually in everyone's interest that there is improved governance, so people can invest in countries without risk from corruption. Business can be done with integrity, which is the way most business people want it done.

Q. Are there any findings from the latest BPI that surprised you?

The kinds of issues that the BPI is identifying reflect a very wide range of behavior across companies from OECD countries. We see that companies from some countries seem to be very prone to bribery in certain areas. For example, we compared how companies behave when they're operating in Africa to how they operate in developed countries or high income countries. It seems companies from some countries in Africa appear to be indulging in bribery to an alarming degree. It's disappointing and quite alarming that companies from countries that have ratified the OECD Convention do not behave consistently around the world. Why do they behave so differently? The challenge for us remains to ensure that all the large exporting countries, whether they are currently in the OECD or not, are engaging in clean business. It points to the question of whether some of the countries that are not members of the OECD, and have not ratified the convention, should do so. For example, Brazil has ratified the OECD Convention and is part of the mechanism, whereas Russia, India, and China have not. The opportunity is open to them to explore whether they could ratify the convention and participate in the peer review and monitoring mechanisms. I think it would be a way of bringing them more in line with the rest of the mainstream of the international trading community on this issue.

Q. How should internal auditors of multinational companies respond to the practice of "grease payments" in certain countries, especially if telling management not to do it means shutting down business in that country?

Internal auditors can identify problem areas and then work with local management to eliminate these payments. The TI business principles for countering bribery call for companies to find ways to eliminate such payments, and there are several multinational companies — Shell and BP are two examples — that have taken a very public stance that facilitation payments are a form of bribery and that they don't wish to participate in them. That's a tough stance to take, but once that principle is established, people know there's no point expecting a payment because the company won't provide it. The other thing companies can do is work collaboratively with other companies in a particular country or in their industry to create a consistent approach to these issues and determine what steps need to be taken to eliminate such payments.

Q. Suppose an organization wants to do business in a certain country, but then learns that it ranks low (i.e., very corrupt) on TI's Corruption Perceptions Index (CPI). How should the organization proceed?

A low score on the CPI acts as a flag to a company that it needs to undertake thorough due diligence both on how it is going to operate and on how its business partners are going to operate on ventures. [The CPI ranks more than 150 countries by their perceived levels of corruption, as determined by expert assessments and opinion surveys. The latest index was released in November.] The best outcome is to go ahead with the investments, but not to compromise business standards. Companies must conduct assessments of the risk of corruption and how it might undermine the integrity of the operation, the company's reputation, or the financial returns it might make and then take steps to mitigate the risk.

Q. You frequently have to deliver information that many people may not want to hear. What advice do you have for internal auditors who often struggle with this same task?

First, be clear on what is the message. Second, understand the position and perspective of the people to whom you have to deliver the message, but stick to your findings. Finally, clearly and unequivocally present the facts to back up the findings and the results.

To comment on this article, e-mail the author at steven.alvarez@theiia.org.

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