Private-sector corruption in developing countries costs at least $500 billion - study

by Stella Dawson | | Thomson Reuters Foundation
Wednesday, 22 January 2014 08:25 GMT

An employee of GSA Austria (Money Service Austria) opens a safe containing bundles of 50 and 20 euro banknotes at the company's headquarters in Vienna, on July 22, 2013. REUTERS/Leonhard Foeger

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Findings from CSIS suggest that corporations and private firms are responsible for one-third to half of bribery costs globally

WASHINGTON (Thomson Reuters Foundation) – Private-sector corruption in developing countries is a tax on growth, costing at least $500 billion a year - more than three times all foreign assistance in 2012, according to a new study.

The Center for Strategic and International Studies (CSIS) said its calculations, which are based on World Bank surveys of firms in 105 developing countries, illustrate the scale of damage from corporations bribing public officials.

“It is a far more serious problem than I think the international development community has put time, money and effort into,” said Daniel Runde, director of the Project on Prosperity and Development at CSIS, in releasing the preliminary report.

Corruption distorts incentives in the marketplace and creates inefficiencies in the economy, factors that are not directly measurable but that further weaken overall growth and undermine confidence and trust in government, according to the report entitled “Costs of Corruption: Strategies for Ending a Tax on Private Sector-led Growth”.

Its findings suggest that at least one-third of corruption costs globally comes from the private sector. Landmark work by Daniel Kaufmann at the World Bank in 2005 estimated that all corruption – public and private, including bribes paid by households and individuals – exacts an annual toll of $600 billion to $1.5 trillion, deepening poverty in many countries by robbing the government of revenues.

While prosecutions under the U.S. Foreign Corrupt Practices Act and similar legislation in other major economies have forced corporations to manage corruption risk through rigorous compliance programmes, Roderick Hills, chairman of the CSIS Program on Governance, said that in too many firms, corporate officials remain “cavalier about paying off governments.”

A deeply ethical corporate culture has yet to take hold, Hill said in recommending more disclosure of public contracts at a panel discussion on the CSIS findings. 

Michael Hershman, president of the Fairfax Group corporate consultancy firm, said another problem is that the bribe seekers are not exposed when corporations are prosecuted, only the bribe payers. “So we are leaving in place the corrupt players to extort money from the next corporation,” he said.

He cited the Padma Bridge scandal in 2013. The World Bank pulled out of funding the project and debarred the Canadian engineering company SNC-Lavalin Inc. for bribery, but the Bangladeshi official involved remained in office.  Similarly, Alcoa Inc. reached a $384 million settlement with the Department of Justice this month for bribing Bahraini officials, but those officials were not exposed.

The CSIS report makes a number of recommendations on ways to strengthen anti-corruption efforts:

  • Deepen the research agenda to examine the link between good governance and its positive impact on the value of a company, which could encourage more companies to invest in anti-bribery efforts.
  • Apply new technologies to expose corruption and to seek policy changes through business and civil society coalitions.
  • Require anti-corruption components in free trade agreements, including improved transparency in public procurement systems.

The CSIS calculations on the costs of corruption in the private sector relied on data from the World Bank Enterprise Surveys of firms, excluding agriculture and extractive industries, in 105 developing countries. They are conducted on a three- to four-year cycle and include questions on bribery in day-to-day transactions and in government procurement.

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