Stick and Carrot: How to Interest Business in Fighting Corruption

Practically speaking, businesses don’t have any incentives to implement effective anti-corruption measures today: the magnitude of sanctions and the probability of punishment are still low, and they are absolutely unable to restrain businesses from committing crime. Organizations still can’t avoid the liability for corruption even when they implement meaningful preventive measures, or when they disclose corruption committed by their employees. How we can change this situation?

December 21st, 2013. The attention of most people in Ukraine was focused on Euromaidan: events were getting worse with each passing day. Almost unnoticed passed a small piece of news from the USA, which Ukrainians could read on several web-sites. Archer Daniels Midland Company was ordered to pay a $17 mln fine for the bribery of Ukrainian tax authorities. The scope of this corruption case is breathtaking: businesses paid about $22 million in bribes in exchange for reimbursement of paid value-added taxes, amounting to about $100 mln in 2002-2008. The United States received additional millions of dollars to its state budget in the form of fines, but for Ukrainian law enforcement this story seemed uninteresting. The case against the tax workers that received the bribes was opened only last autumn.

This case seems relevant today for two reasons. First, businesses continue to provide so-called “corrupted business as usual” keeping up a silent consensus on corruption: I mutely give you a bribe, you silently take it, we mutually keep our mouths shut, otherwise we together will be punished. Second, Ukrainian laws haven’t been stimulating businesses to active participation in fighting corruption.

The Organization of Economic Cooperation and Development published a report on business businesses’ responsibilities regarding corruption in Eastern Europe and Central Asia in 2015. The OECD gave several recommendations:

1. to effectively make businesses responsible for corruption they commit;
2. to ensure corporate responsibility by making businesses responsible for corruption committed by their employees or agents;
3. to make businesses responsible for crimes committed in the interests of parties other than the business and its client, or so-called “third parties”;
4. to guarantee the autonomy of investigations against businesses, keeping them separate from the investigations against the individuals who committed the corruption
5. to prevent a business from being immune from responsibility for corruption if it divides or merges;
6. to establish proportionate and restrictive financial sanctions;
7. to provide special sanctions that can only be applied to legal businesses (for example, banning their participation in the public procurement process, cancelling certain licences, banning them from receiving receiving state support, etc.); to use a “due diligence defence” that would allow a business to prove its commitment to fighting corruption and its effective compliance management;
8. to establish an advanced form of assets forfeiture that would allow for a confiscation of a business’s property when its legal origin can’t be proven;
9. to consider the possibility of providing prosecutors with discretionary powers, which would allow them focus on important investigations;
10. to create a system of collecting statistics regarding law enforcement in the field of businesses’ responsibility;
11. to investigate the effect of sanctions on businesses;
12. to take steps aimed at raising awareness about corporate responsibility among law enforcement bodies, prosecutors, judges, and business representatives.

What is the situation with corporate responsibility in Ukraine, and which of the recommendations are the most relevant today?

Last month, Andriy Sherepenko analysed the Ukrainian approach to private sector responsibility for corruption crimes. Although several recommendations were taken into consideration, the author stressed the necessity of strengthening sanctions, establishing an advanced form of assets forfeiture, and setting up an impersonal model of corporate responsibility (i.e., businesses would have to respond for the committed corruption crime even the guilty individual hasn’t been identified).

It’s hard to argue with the author: existing monetary sanctions have nearly no effect on corruption in businesses. However, we also need to look at other ways of avoiding liability. The Ukrainian Criminal Code allows for just one way to avoid liability for corruption, which is through the statute of limitations.

However, we can find more effective approaches in developed countries. For example, in Italy legal a business can avoid liability if it can prove that it executed all necessary steps to have prevented the crime. The same practice is found in the UK Bribery Act 2010. Section 7 of this law releases a business from liability for corruption if it took necessary steps to prevent the crime (for example, was conducted corruption risk assessment, implemented compliance program, allocated all necessary resources to provide anticorruption procedures, were conducted trainings for employees how to act in several situations etc.)

This approach corresponds with the 7th recommendation (use a “due diligence defence”) of the OECD Report. No any organization can absolutely eliminate the possibility of corruption. But it can be released from liability in the case of real steps aimed to deterring corruption.

One of such common mechanisms is the implementation of a compliance program (an internal document where explained all necessary measures and procedures to prevent offense).  This would reveal the degree to which a business was trying to avoid corruption.

In Ukraine only a few state-owned/municipal enterprises and participants of public procurements (worth above 20 million UAH) are obliged to have such an anticorruption compliance program. But even in the case of implementing effective measures, a business still retains its liability, so businesses have no incentive make the compliance program effective. One solution to this problem might be making several amendments to the Ukrainian Criminal Code that would allow a business to avoid liability if it implements meaningful anticorruption measures or informs law enforcement bodies of corruption its employees commit.

For the sake of preventing new corruption and eliminating unnecessary discretion in Ukrainian laws, we have to use clear criteria to measure the effectiveness of existing  anticorruption measures. As the examples we can take the British Standart BS 10500: 2011 “Anticorruption Management System” or OECD «Anti-Corruption Ethics and Compliance Handbook for Business» where we can find the best and the most progressive practices.

According to Transparency International Ukraine former Executive Director Oleksii Khmara, about 40% of large business and medium-sized enterprises in Ukraine have committed corruption offenses.

Practically speaking, businesses don’t have any incentive to implement effective anti corruption measures today: the magnitude of sanctions and probability of punishment are still low and cannot restrain businesses from committing the crime. Organizations still can’t avoid the corruption liability, even if they implement meaningful anticorruption measures and disclose corruption committed by individuals.

To improve the situation moving forward, the following steps are necessary:

1. significant strengthening of sanctions on legal businesses, especially providing special sanctions, which could be applicable just only to legal businesses;
2. establishing the possibility of businesses’ liability as separate from that of the individual who committed the crime;
3. Establish the possibility for a business to avoid liability if it takes meaningful anticorruption steps;
4. determine clear criteria for anticorruption compliance effectiveness by legal businesses;
5. establish the possibility of avoiding liability if businesses inform law enforcement about corruption committed by their employees.

Combating corruption in the private sector look like a great puzzle with dozens of details. It consists not only of serious sanctions on liable parties, but also comprehensive judicial reform, deregulation, increasing effectiveness of law enforcement bodies.

Nevertheless, only powerful “sticks” (serious sanctions) and “carrots” (several new stimuli) can interest businesses to become a real ally of Ukrainian society in combating the corruption that has been impeding the development of the country for years.